NON-PARTY COSTS ORDERS: ALL THE LAW IN ONE USEFUL PLACE

Making an application for a non-party costs order can be a controversial step in the proceedings. The, principles, law and practice are thoroughly reviewed by Mr Justice Akenhead in Weatherford Global Products Ltd -v- Hydropath Holdings Ltd [2014] EWHC 3243 (TCC).

THE CASE

A trial had taken place in relation to products supplied by Hydropath.  The defendant was unsuccessful. Initially the defendant had made a large number of counterclaims. These were abandoned during the course of the trial.  After the trial an application was made to join in a director of the defendants for a costs order to be made personally.

THE REVIEW OF THE LAW

1. On 22 August 2014, I made orders for costs as follows, namely that Hydropath and Clearwell should pay the costs of Weatherford on a standard basis in relation to its Claim against Hydropath and, in relation to the Counterclaim, the costs of both Weatherford and the Fourth to Sixth Parties on an indemnity basis. I ordered that interim payments on account of costs should be made in favour of the Fourth to Six Parties in the sum of £225,000 and of Weatherford in the sum of £750,000, payable within 21 days. Those sums have not been paid.

2. Weatherford and the Fourth to Sixth Parties applied to join Dr Stefanini as a party to the proceedings for the purposes of seeking a costs order against him personally. Permission was granted. Extensive evidence has been exchanged and I heard Counsel for Weatherford, the Fourth to Sixth Parties and Dr Stefanini for the best part of the day. I am grateful to Counsel for their carefully prepared written submissions and helpful oral argument.

The Law

1. There is no doubt that the Court has jurisdiction to make an order that the costs of any particular piece of litigation should be borne by someone who is not a party to that litigation. Section 51 of the Senior Courts Act 1981 provides as follows:

“(1) Subject to the provisions of this or any other enactment and to rules of court, the costs of and incidental to all proceedings in—

… (b) the High Court…

shall be in the discretion of the court…

(3) The court shall have full power to determine by whom and to what extent the costs are to be paid.”

1. It has been said that costs orders made against non-parties are “exceptional” but in the Privy Council decision in Dymocks Franchise Systems (NSW) Pty Ltd v Todd [2004] UKPC 39, Lord Brown in giving the opinion of the Court said at Paragraph 25 (1):

“Although costs orders against non-parties are to be regarded as “exceptional”, exceptional in this context means no more than outside the ordinary run of cases where parties pursue or defend claims for their own benefit and at their own expense. The ultimate question in any such “exceptional” case is whether in all the circumstances it is just to make the order. It must be recognised that this is inevitably to some extent a fact-specific jurisdiction and that there will often be a number of different considerations in play, some militating in favour of an order, some against.”

This dictum also contains the overriding requirement which is that the discretion is to be exercised only against a non-party if, when and to the extent that it is just to do so.

1. There have been a substantial number of cases involving costs orders sought against non-parties but it is clear that the categories of case are neither rigid nor closed. They are, very much, fact sensitive. Balcombe LJ gave a helpful judgement in Symphony Group Plc v Hodgson [1994] QB 179 which may be considered to be germane to the current case; he had regard to various reported decisions where the court had been prepared to order a non-party to pay the costs of proceedings, continuing at Page 191F:

“(1) Where a person has some management of the action, e.g. a director of an insolvent company, who causes the company improperly to prosecute or defend proceedings…

(2) Where a person has maintained or financed the action…

(4) Where the person has caused the action…

I accept that these categories are neither rigid nor closed. They indicate the sorts of connection which have so far led the courts to entertain a claim for costs against a non-party.”

1. He went on to acknowledge what an appellate judge had said in an earlier case (“There is only one immutable rule in relation to costs, and that is that there are no immutable rules.” Per Lloyd LJ –Taylor v Pace Developments Ltd [1991] B.C.C. 406, 408) and continued at Page 192G:

“In my judgment the following are material considerations to be taken into account, although I do not suggest that there may not be others which are relevant.

(1) An order for the payment of costs by a non-party will always be exceptional…

(2) It will be even more exceptional for an order for the payment of costs to be made against a non-party, where the applicant has a cause of action against the non-party and could have joined him as a party to the original proceedings…

(3) Even if the applicant can provide a good reason for not joining the non-party against whom he has a valid cause of action, he should warn the non-party at the earliest opportunity of the possibility that he may seek to apply for costs against him. At the very least this will give the non-party an opportunity to apply to be joined as a party to the action…

(4) An application for payment of costs by a non-party should normally be determined by the trial judge…

(6) The procedure for the determination of costs is a summary procedure, not necessarily subject to all the rules that would apply in an action…”

Since a certain amount has been made by Counsel for Dr Stefanini about the failure to warn him before the liability judgement of a possibility that he might be joined to secure a costs order against him personally, it should be noted that Balcombe LJ’s observations about the failure to warn relate to a non-party against whom the Claimant had a valid cause of action; there has been no suggestion that there was any arguable valid cause of action by Weatherford or the Fourth to Sixth Parties against Dr Stefanini.

1. The Dymocks case also provides highly persuasive advice about how and on what basis costs orders against non-parties can or should be approached. Lord Brown from Paragraph 25, having addressed what “exceptional” meant (see above), continued his summary of the position:

“(2) Generally speaking the discretion will not be exercised against “pure funders”, described in para 40 of Hamilton v Al Fayed (No 2) [2003] QB 1175, 1194 as “those with no personal interest in the litigation, who do not stand to benefit from it, are not funding it as a matter of business, and in no way seek to control its course”. In their case the court’s usual approach is to give priority to the public interest in the funded party getting access to justice over that of the successful unfunded party recovering his costs and so not having to bear the expense of vindicating his rights.

(3) Where, however, the non-party not merely funds the proceedings but substantially also controls or at any rate is to benefit from them, justice will ordinarily require that, if the proceedings fail, he will pay the successful party’s costs. The non-party in these cases is not so much facilitating access to justice by the party funded as himself gaining access to justice for his own purposes. He himself is “the real party” to the litigation, a concept repeatedly invoked throughout the jurisprudence – see, for example, the judgments of the High Court of Australia in Knight and Millett LJ’s judgment in Metalloy Supplies Ltd (in liquidation) v MA (UK) Ltd [1997] 1 WLR 1613…Some reflection of this concept of “the real party” is to be found in CPR 25.13 (1) (f) which allows a security for costs order to be made where “the claimant is acting as a nominal claimant”.

(4) Perhaps the most difficult cases are those in which non-parties fund receivers or liquidators (or, indeed, financially insecure companies generally) in litigation designed to advance the funder’s own financial interests…

26. In a more recent case in the High Court of New Zealand, Arklow Investments Ltd v MacLean (unreported, 19 May 2000), Fisher J said:

“19. The guiding principle here is that costs orders against third parties are exceptional but that they are warranted in cases where there would otherwise be a situation in which a person could fund litigation in order to pursue his or her own interests and without risk to himself or herself should the proceedings fail or be discontinued.

20…[W]here a person is a major shareholder and dominant director in a company which brings proceedings, that alone will not justify a third party costs order. Something additional is normally warranted as a matter of discretion. The critical element will often be a fresh injection of capital for the known purpose of funding litigation.

21…[T]he overall rationale [is] that it is wrong to allow someone to fund litigation in the hope of gaining a benefit without a corresponding risk that that person will share in the costs of the proceedings if they ultimately fail.”

27. In the High Court of Australia in the Knight case, Mason CJ and Deane J at p 595 said this:

“For our part, we consider it appropriate to recognise a general category of case in which an order for costs should be made against a non-party and which would encompass the case of a receiver of a company who is not a party to the litigation. The category of case consists of circumstances where the party to the litigation is an insolvent person or man of straw, where the non-party has played an active part in the conduct of the litigation and where the non-party, or some person on whose behalf he or she is acting or by whom he or she has been appointed, has an interest in the subject of the litigation. Where the circumstances of a case fall within that category, an order for costs should be made against the non-party if the interests of justice require that it be made.”

28. The final judgment from which their Lordships would cite in this connection is that of Millett LJ in Metalloy Supplies already referred to, at p 424-425:

“[An order] may be made in a wide variety of circumstances where the third party is considered to be the real party interested in the outcome of the suit…It is not, however, sufficient to render a director liable for costs that he was a director of the company and caused it to bring or defend proceedings which he funded and which ultimately failed. Where such proceedings are brought bona fide and for the benefit of the company, the company is the real plaintiff. If in such a case an order for costs could be made against a director in the absence of some impropriety or bad faith on his part, the doctrine of the separate liability of the company would be eroded and the principle that such orders should be exceptional would be nullified.

The position of a liquidator is a fortiori. Where a limited company is in insolvent liquidation, the liquidator is under a statutory duty to collect in its assets. This may require him to bring proceedings. … If he brings the proceedings in the name of the company, the company is the real plaintiff and he is not. He is under no obligation to the defendant to protect his interests by ensuring that he has sufficient funds in hand to pay their costs as well as his own if the proceedings fail.”

29. In the light of these authorities their Lordships would hold that, generally speaking, where a non-party promotes and funds proceedings by an insolvent company solely or substantially for his own financial benefit, he should be liable for the costs if his claim or defence or appeal fails. As explained in the cases, however, that is not to say that orders will invariably be made in such cases, particularly, say, where the non-party is himself a director or liquidator who can realistically be regarded as acting rather in the interests of the company (and more especially its shareholders and creditors) than in his own interests.”

1. Lord Brown confirmed at Paragraph 33 that the “pursuit of speculative litigation” may in itself support in making of a costs order against a non-party.

2. Mr Justice Lewison (as he was then) sitting in the Court of Appeal in Systemcare (UK) Ltd v Services Design Technology Ltd and Sharif [2011] EWCA Civ 546 made some useful further comments referring to the decisions in Symphony Group and Dymocks amongst others:

23. A non-party costs order should not be made where the relevant costs would have been incurred anyway without the involvement of the non-party: Dymocks Franchise Systems (NSW) Pty Ltd v Todd … §§ 18-20; Goodwood Recoveries Ltd v Breen [2005] EWCA Civ 414, [2006] 1 WLR 2723 § 74; Nelson v Greening & Sykes (Builders) Ltd[2007] EWCA Civ 1358 § 61…

26. As with Balcombe LJ’s classification, these principles [referred to by Lord Brown in Dymocks] are guidance not rules. As Longmore LJ said in Petromec (§ 12) Lord Brown’s words are emphatically not a statute. The ultimate question is whether it is just to make the order. It is wrong to treat the reported cases as providing a comprehensive check list of factors which must be present in every case before the discretion can be exercised in a particular case. What may be sufficient to justify the exercise of the discretion in one case should not be treated as a necessary factor for the exercise of the discretion in a different case: Secretary of State for Trade and Industry v Aurum Marketing Ltd [2000] EWCA Civ 224, [2002] BCC 31 (Mummery LJ).

27. Lord Brown’s third principle refers to the case of a non-party who funds the proceedings. However, this is not a pre-condition to the jurisdiction to make a non-party costs order. Again Longmore LJ explained the position in Petromec (§ 10):

“I would only observe that, although funding took place in most of the reported cases, it is not, in my view, essential, in the sense of being a jurisdictional pre-requisite to the exercise of the court’s discretion. If the evidence is that a respondent (whether director or shareholder or controller of a relevant company) has effectively controlled the proceedings and has sought to derive potential benefit from them, that will be enough to establish the jurisdiction. Whether such jurisdiction should be exercised is, of course, another matter entirely and the extent to which a respondent has, in fact, funded any proceedings may be very relevant to the exercise of discretion.”

28. In the present case there is no question but that Mr Sharif has effectively controlled the proceedings and has sought to derive potential benefit from them. Jurisdiction is thus established…

31. As indicated by Millett LJ in Metalloy the countervailing principle in play is the principle of corporate limited liability. But as Millett LJ also indicated that principle can be outflanked if the director against whom a non-party costs order is sought is guilty of some bad faith or impropriety. In Goodwood Rix LJ emphasised (§ 50) that impropriety without bad faith is sufficient to outflank the principle.

32. In Goodwood Rix LJ summarised his conclusion as follows (§ 59):

“Where a non-party director can be described as the “real party”, seeking his own benefit, controlling and/or funding the litigation, then even where he has acted in good faith or without any impropriety, justice may well demand that he be liable in costs on a fact-sensitive and objective assessment of the circumstances. It may also be noted that in Lord Brown’s comments at para 33 of his opinion “the pursuit of speculative litigation” is put into the same category as “impropriety”.”

33. It is to be noted that controlling on the one hand and funding on the other are separated by “and/or”. Thus it is not the case that both elements need to be present. This is exactly what Longmore LJ had said in Petromec. Likewise it is notable that Rix LJ does not refer to insolvency of the party itself during the pendency of the litigation; although plainly if the party against whom costs have been ordered is in a position to pay them there will seldom be any need for a non-party costs order.

34. In considering the question of funding, it is worth considering what the concept involves. Again, the Petromec case is instructive. Following the loss of an oil rig Petromec received a payout of $147 million. It paid over all but $2 million to its parent company which was ultimately controlled by Mr Efromovich. That $2 million was used to fund litigation which ultimately failed. In considering whether to make a non-party costs order against Mr Efromovich one of the arguments raised on his behalf was that he should not be liable for any costs before the $2 million had been exhausted. Longmore LJ said:

“This is a hopeless contention. The sum of $2 million was only left in Petromec because its holding company Petromec Holdings Ltd, which was itself controlled by Synergy Group Corporation chose to leave it there instead of taking it out along with the other $145 million or so representing the Total Loss Payment. It was thus the owner of Synergy Group Corporation who decided to use the $2 million to fund the start of the litigation, in other words Mr Efromovich.”

35. Thus the action of Mr Efromovich in leaving money in Petromec which he could have taken out, even though he was not the source of the money, counted as funding the proceedings. The fact that the money belonged to other companies rather than to Mr Efromovich personally did not matter.”

1. The same judge had to address another non-party costs order case in Threlfall v ECD Insight Ltd [2013] EWCA Civ 1444. He said at Paragraph 13:

“If a non-party costs order is made against a company director, it is quite wrong to characterise it as piercing or lifting the corporate veil; or to say that the company and the director are one and the same. As Mr Shaw has demonstrated, the separate personality of a corporation, even a single-member corporation, is deeply embedded in our law. But its purpose is to deal with legal rights and obligations. By contrast, the exercise of discretion to make a non-party costs order leaves rights and obligations where they are. The very fact that the making of such an order is discretionary demonstrates that the question is not one of rights and obligations of a non-party, for no obligations exist unless and until the court exercises its discretion. Moreover the fact that the discretion, if exercised, is exercised against a non-party underlines the proposition that the non-party has no substantive liability in respect of the cause of action in question. Of course, it is not enough merely to say that Mr Whitney was a director of ECD, but in deciding whether or not to make such an order, the court is not fettered by the legal realities. It is entitled to look to the economic realities. It is in this sense that many of the cases pose the question whether the non-party is “the real party” in the case. In the present case, (1) Mr Whitney is the sole shareholder in ECD and is therefore entitled to all its economic benefits; (2) Mr Whitney is the sole director of ECD and makes all decisions on its behalf; (3) ECD was under Mr Whitney’s absolute control and he ran it without regarding himself as accountable to anyone else; (4) the variation of the contract under which Mr Threlfall’s entitlement arises was, on the judge’s finding, made by Mr Whitney not only in his capacity as managing director, but also in his capacity as sole shareholder; (5) Mr Whitney sought to resile from that contract because it was so damaging to his own financial interests as well as the company’s. The judge’s phrase “sought to resile” suggests knowing resiling from that contract; (6) the failed counterclaim would also have been to Mr Whitney’s financial benefit had it succeeded, because it would have paved the way for the argument that Mr Threlfall had forfeited his entitlement to the claimed share of equity; (7) the result of Mr Threlfall’s success was that Mr Whitney would either be deprived of part of the value of his own shareholding or his entitlement by way of dividend to the payment in lieu, and thus Mr Whitney can be seen to have defended his own position in resisting the dilution of his own shareholding; (8) it is usually a matter of indifference to a corporation who its shareholders are, and consequently a battle over shareholdings is in reality a battle between shareholders; (9) Mr Whitney gave evidence in support of ECD’s defence, and his evidence was in part rejected and in part found not to be credible. It is quite clear, as Mr Freedman demonstrated, that on analysis this section of Mr Whitney’s evidence was given in bad faith; (10) Unlike most cases of non-party costs order Mr Whitney was in fact a party and as such entitled to participate in the trial to the fullest extent possible; and (11) Mr Whitney caused the company to advance a false defence which he must have known was false.”

1. Substantial reliance was placed by Mr Sachdeva for Dr Stefanini on the need for a timely warning to be given to the non-party, it being suggested that it was either a pre-requisite for an order to be made against the non-party or a factor which had to be applied by the Court at least in reducing in percentage terms any costs order which might be made. I do not accept that the failure to warn can or should necessarily have those consequences, albeit it is undoubtedly a material factor for the Court to take into account, to be given more or less weight as the case may demand. Reliance was placed on the Court Appeal decision in Myatt v National Coal Board [2007] EWCA Civ 307 which involved an appeal by claimants who had secured conditional fee agreements with their solicitors; the cases involving hearing loss by former coalminers having been settled, the costs judge found that the CFAs were unenforceable thus rendering the After the Event legal expenses insurance invalid. The claimants appealed, it being fairly clear that it was the solicitors who had the primary interest in promoting the appeal; the defendant had failed to warn the claimants’ solicitors that they would seek an order for costs against them personally. Dyson LJ (as he then was) accepted that the Court had jurisdiction to order costs against the solicitors, and indeed he made an order against them. He said at Paragraphs 12 to 15:

12. I turn, therefore, to consider whether this court should make an order in the present case. What was at stake in the appeals of these four claimants? So far as the claimants were concerned, the disbursements of approximately £2,500 each; so far as Ollerenshaws were concerned, it was their profit costs of approximately £12,000-£16,000 in the four cases. But of far greater significance was the fact that their profit costs in the region of £200,000 in approximately 60 cases were at stake. Viewed in this way, it seems to me inescapable that the main reason why this expensive appeal was launched was to protect Ollerenshaws’ claim to their profit costs.

13. In the Dymocks case at paragraph 20, Lord Brown made the point that, but for the involvement of the non-party, the unsuccessful appellant would not have pursued its appeal. We were not told by Sir Geoffrey whether the four claimants would have pursued their appeals to this court in order to obtain reimbursement from the defendant of their disbursements, but I think it most unlikely that they would have done so. It is unfortunate that the defendant did not warn Ollerenshaws at an early stage of the appeals process that, if the appeal failed, it would or might apply for costs against the solicitors. Failure to do this is a factor to be taken into account in deciding whether or not to make an order against the non-party; see Symphony Group page 193C. Sir Geoffrey did not tell us whether, if they had received such a warning at an early stage, Ollerenshaws would have abandoned the appeal. The fact that Ollerenshaws have not felt able to say that this is what they would have done leads me to conclude that it is unlikely that, faced with such a warning, they would have abandoned the appeal. Nevertheless, they were denied the opportunity of taking that course.

14. I think it important to emphasise the need for parties who think that they may apply for an order for costs against solicitors in circumstances such as obtained in the present case to warn the solicitors at an early stage, so as to give them a reasonable opportunity for deciding whether or not to continue with the proceedings.

15. In my view, a fair and just order to make in this case is to order Ollerenshaws to pay 50 per cent of the defendant’s costs of the appeal. In arriving at this percentage I have taken into account the fact that the claimants had a real financial interest in the success of the appeals; their disbursements represented approximately one third of the total costs incurred by them before their claims were settled. I also take into account the fact that Ollerenshaws were not given a warning until the appeals had been dismissed that an application for costs might be made against them.”

1. I do not consider that this case necessarily lays down any fixed and binding requirement that a court on a non-party costs order application must always or invariably disallow or reduce any costs order that might otherwise have been made where the non-party has not been warned beforehand that such an application might be made. There was for instance in the Myatt case no hint or suggestion of impropriety or the pursuit of a speculative appeal.

THE ORDER MADE IN THIS CASE

1. Having regard to the legal authorities, and in particular those referred to above, I consider that the following factors can and indeed should be taken into account:

(a) Dr Stefanini was at all material times the major shareholder both in Hydropath and in Clearwell.

(b) He has throughout had and exercised full control of both companies. There is no reliable evidence that anyone else either did or was invited to make any of the important decisions affecting the companies. All decisions on all matters relating to the litigation, that is in relation to the defence of the proceedings by Weatherford and the pursuit of the Counterclaim, were taken by Dr Stefanini. He has controlled the litigation.

(c) Primarily he (but otherwise in relatively minor respects his wife and two daughters) stood to benefit from the litigation and the Counterclaim. If, for instance, Hydropath had succeeded in its Counterclaim that Weatherford had acted in bad faith in raising safety concerns about the Clearwell Product, there could well have been substantial damages flowing from the lack of orders for the Product; that would in all probability have translated itself through the company accounts into dividends payable to him or at the very least enabled the repayment of loans made by him and his wife.

(d) Primarily, he has been shown by the evidence to have funded approximately half (at least) of the costs of the litigation, by way of loan back of £800,000’s worth of dividend and by cash payments since about March 2014.

(e) Without that loan and without the cash payments, Hydropath was otherwise insolvent; it is accepted (and in any event is established) that Clearwell was at all material times in effect during all or most of the litigation effectively insolvent save for the fact that it was being supported by Hydropath.

(f) The counterclaims, insofar as they involved the incurrence of any significant costs, were without exception speculative in that they were put forward without any real analysis as to whether there was in reality any prospect of success. The decision for pursuing those counterclaims was substantially and substantively that of Dr Stefanini.

(g) Whilst it was not unreasonable on legal and commercial grounds to contest the proceedings, it was unreasonable to mount let alone pursue the speculative counterclaims referred to above. The decision to bring and pursue them was in effect that of Dr Stefanini alone. The costs of and occasioned by the pursuit of thee counterclaims would not otherwise have been incurred in any event or at all by Weatherford, MSL and Messrs Clark and Lauretti.

(h) Given what I have seen of Dr Stefanini and the views which I have formed about his character, including his conviction that he was always right and everyone else was wrong when it came to the Clearwell Product, I am satisfied that it is positively unlikely that, even if he had been warned in advance that Weatherford, MSL and Messrs Clark and Lauretti would seek costs against him personally, he would have done anything different from what he did which was to continue to defend the claim and to pursue through to judgment the counterclaims. The absence of any warning is more than cancelled out by the other factors as set out above.

1. Taking all these factors into account, I have formed the very clear view that it is just and fair that Dr Stefanini personally pays the costs of Weatherford, MSL and Messrs Clark and Lauretti of and occasioned by the counterclaims. I have already decided that Hydropath and Clearwell are required to pay these costs on an indemnity basis.

NOT A TOTAL COACH AND HORSES THROUGH THE CORPORATE VEIL

It is to be noted that this was not a total piercing of the corporate veil.  Personal liability was only ordered in relation to the costs of the counterclaim (which the judge felt was fundamentally misconceived).

POINTS TO NOTE: WOULD EARLY NOTIFICATION OF A POTENTIAL APPLICATION HAVE MADE A DIFFERENCE?

The notification (or “threat”) of an application for personal liability for costs is clearly a relevant factor.  However this has to be balanced against the risk that sending out notification of a potential application could become a standard practice, as an insurance policy, in any event.