Abuse of process and striking out second claims

Successive related actions brought against the same or different defendants may in principle be an abuse of process. A claimant who chooses not to inform the court about the possibility of the need for a second action will be in breach of the overriding objective and what has become known as “the Aldi requirement”. We look at the recent decision of Otkritie Capital International Ltd v Threadneedle Asset Management Ltd and the consequences for litigants of breaching the Aldi requirement in the light of the Jackson reforms, in particular costs budgeting, and the recent court fee increases.

Finality of litigation versus access to justice

This topic concerns the tension between two principles. The first is the public interest in finality of litigation. Litigation should not drag on for ever and defendants should not be harassed twice in respect of the same set of circumstances. This principle has been reinforced in recent years by the ever-increasing emphasis on efficiency and economy in the conduct of litigation, both in the interest of the parties and the public as a whole.

The second principle is that of access to justice: the right of a claimant to bring a genuine subject of litigation before the court and to choose which parties to sue.

Before looking at Otkritie, we need to chart the progress of the tension between these principles in the courts.

Henderson v Henderson abuse of process

The rule in Henderson v Henderson requires the parties to bring their whole case before the courts so that all aspects of it may be finally decided once and for all. In the absence of special circumstances, the parties cannot return to the court to advance arguments, claims or defences which they could have put forward for decision on the first occasion, but failed to raise. The rule is not based on the doctrine of res judicata, it does not require issue or cause of action estoppel, and it applies whether the first action proceeds to trial or is settled. A claim brought in breach of this rule is an abuse of process.

Johnson v Gore Wood

In Johnson v Gore Wood the House of Lords adopted “a broad merits-based” approach to the issue of Henderson abuse of process and refused to strike out the claimant’s personal claim against the defendant solicitors, where he had already brought a claim against them arising out of the same circumstances on behalf of his company. He didn’t have sufficient funds to bring the second, more complex, claim at the same time as the company’s claim and there was a risk that the company would become insolvent if the litigation was delayed by the introduction of the second claim.

In Dexter Ltd v Vlieland-Boddy the Court of Appeal summarised the principles to be derived from Johnson where a claimant chooses not to bring a single set of proceedings against all the potential defendants. Clarke LJ said that it would be a rare case in which a new defendant in a later action would be able to persuade the court that the action against him is oppressive. In large commercial disputes, it may well not be in the best interests of the parties or the public interest for all claims to be dealt with in a single action.

The Aldi requirement

In Aldi Stores Ltd v WSP London Ltd the Court of Appeal held that a single set of proceedings against several defendants was not necessarily the best solution and that the courts may have to provide a second trial against the same defendants. It reversed Jackson J’s decision that the second action was an abuse of process.

In this construction dispute, Aldi initially brought proceedings against the main contractor and obtained judgment against it for part of its loss. When the contractor became insolvent, Aldi tried to recover from the contractor’s insurers but they avoided the claim on the ground of non-disclosure. At that stage, Aldi began new proceedings against the professional consultants, who had been joined as third parties to the original action.

Thomas LJ considered that Aldi's decision to pursue the insurers rather than continue to participate in the first action (which was joined with other actions against the contractor and ultimately settled mid-trial) was sensible and cost effective in the particular circumstances. He concluded that there is a real public interest in allowing parties a measure of freedom to choose whom they sue in complex commercial disputes, and not to give encouragement to bringing a single set of proceedings against a wide range of defendants, or to complicate proceedings by cross-claims.

Thomas LJ went on to formulate what has become known as “the Aldi requirement”. The parties’ freedom to choose which parties to sue can and should be restricted by appropriate case management. The proper course is to raise the issue with the court in terms making it clear what the court was being invited to do. He noted that in future there would be no excuse for failing to do so.

Background to Otkritie

The Russian financial group, Otkritie, was fraudulently induced to purchase Argentine government warrants at an overvalue. They ultimately sued 19 defendants in what became known as the 2011 Litigation. These included former employees of the claimant’s group of companies and also Mr Gersamia, a former employee of the Threadneedle group. The claims proceeded to trial and in 2013 the claimants were awarded "in principle" more than US$150 million.

In 2014 the claimants began proceedings (the 2014 Litigation) against two Threadneedle companies for US$120 million as damages or equitable compensation. They relied on the judgment against Mr Gersamia in the 2011 Litigation and sued the Threadneedle companies, alleging that they were vicariously liable for his fraudulent conduct. They could have joined the Threadneedle companies as defendants in the 2011 Litigation but had not mentioned this possible claim to the court.

The decision in Otkritie

Knowles J refused to strike out the claims against the Threadneedle companies as an abuse of process. He was in no doubt that Otkritie had breached the Aldi requirement by failing to mention these potential claims to the court in the 2011 Litigation, and that this was not acceptable behaviour. He was also clear, however, that such a case management breach is not by itself necessarily sufficient to constitute an abuse of process (the same approach was taken recently in Clutterbuck v Cleghorn). The judge indicated that costs sanctions would be the appropriate response to Otkritie’s breach of the Aldi requirement.

Relevant factors

To understand this decision and those that preceded it, it will be helpful to list the factors that have persuaded judges not to strike out subsequent claims, whether as an abuse of process or because of a breach of the Aldi requirement.

• The claimant’s ability to fund a larger action
  This was material in Johnson v Gore Wood. The claimant could not afford to bring his personal claim at the outset because he was initially given legal aid only for the company’s claim.
• The extent of the overlap between the first and the second actions
  This is crucial, particularly if the second action involves a collateral attack on the findings in the first action. The second action was found to be an abuse of process in Gladman Commercial Properties v Fisher Hargreaves Proctor because of the extensive overlap of witnesses, issues and evidence between the first and second actions brought alleging fraudulent and/or negligent misrepresentation against different joint tortfeasors. The defendants to the second action had already been subjected to hostile and prolonged cross-examination in the first action, which settled on day 13 of the trial.
• Prejudice to the defendants and other court users
  Gladman is a clear illustration of unacceptable prejudice both to the defendants who had already given evidence and to other court users, since a second trial would have entailed the waste of between four and six working weeks of court time and millions of pounds of wasted costs and lost management time. This could have been avoided had the court known of the potential claims.
• Likely outcome had the court been told of potential claim
  In Football Dataco Limited v Stan James (Abingdon) Limited the judge said that it was no excuse for a failure to comply with the Aldi requirement that that the court would probably not have acted differently if they had been told about the new claim. In Gladman, however, the court was prepared to look into what would have happened and in Otkritie Knowles J concluded that it was relevant. Had the issue been raised with the court in the 2011 proceedings, it was probable that the court would have been persuaded that Otkritie should be allowed to pursue Threadneedle in subsequent proceedings if it chose to do so.
• Other factors
  In Otkritie, the principal reason why the claimants decided not to include Threadneedle in the 2011 Litigation was because that would have involved them changing their solicitors. Hogan Lovells acted for them and for the Threadneedle group. Another reason was that the claimants preferred to try to secure a positive outcome against Mr Gersamia before reaching a final decision, with legal advice from another firm, to move against Threadneedle.
• The role of the defendants
  In Johnson v Gore Wood the defendant firm had known about the personal claim before the trial of the company’s claim and it had been discussed during the settlement negotiations of the company’s claim. It also defended the claim on the merits for more than four years before applying to strike it out as an abuse. In Otkritie the judge stressed that the Aldi requirement is not only a matter for a claimant. A prospective defendant need not invite litigation against itself when that litigation is not otherwise clearly in prospect but they are concerned that a claimant is not complying with the Aldi requirement when it should, it is open to them to apply to the court. All parties are required to help the court to further the overriding objective.

Conclusion

We can expect this problem to arise more frequently with increasing court issue fees and the application of costs budgeting to large commercial claims. A claimant now knows that it is likely to recover a fraction of its costs from the defendant if it wins, given the strict approach to budgeting taken in recent cases such as CIP Properties v Galliford Try. A larger case is considerably more expensive to bring. And at the other end of the spectrum, impecunious claimants like Mr Johnson may be unable to afford to bring a wider or more complex claim at the outset, both because of issue fees and because of difficulties in finding a firm prepared to act on a CFA or DBA.

Claimants are not going to want to inform the court about other potential claims lest they find themselves compelled to bring them or risk being barred from doing so. Defendants or prospective defendants will find the idea of informing the court of potential claims against them to be just as unappealing. Their best bet may be to settle the first action on as favourable terms as possible, ensuring if they can that the settlement agreement includes a release of all claims.