COSTS AGAINST NON-PARTIES: “FOR THE BENEFIT OF MR…. BAILEY”

March 4, 2017 · by · in Applications, Costs

In Sony/ATV Music -v- WMPC Music (In liquidation) & Bailey [2017]EWHC389 (Ch) Mr Justice Arnold made an award against a non-party.  The judgment reviews the relevant law in detail.

“It is therefore necessary to consider what difference it would have made if SATV had warned Mr Bailey. I do not doubt the honesty of Mr Bailey’s evidence that he would have acted in the way that he now says that he would have. That evidence has inevitably been given, however, with the benefit of 20/20 hindsight. I do not accept that it necessarily reflects how Mr Bailey would actually have acted without the benefit of hindsight”.

KEY POINTS

  • The director of a defendant company was, effectively,controlling the litigation,  primarily for his own benefit.
  • It was appropriate to order that defendants to pay the claimants’ costs personally, running from the date that the director had bought the relevant shares.

THEN CASE

The claimants had been successful in their claims in relation to copyright of certain Beatles materials.    An order for costs was made against the defendants. Both defendants were in liquidation and could not pay.Mr Bailey had acquired majority ownership and control of one of the defendants, WMPC, in January 2013. The claimants sought an order that he pay the defendants’ costs from that date.

THE RELEVANT LAW

Applicable principles
    1. Save in one respect, there is little dispute as to the applicable principles. The main principles were authoritatively stated by Lord Brown of Eaton-under-Heywood giving the judgment of the Privy Council in Dymocks Franchise Systems (NSW) Pty v Todd [2004] UKPC 39, [2004] 1 WLR 2807at [25] as follows:

“(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. (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 …Nor, indeed, is it necessary that the non-party be ‘the only real party’ to the litigation …. provided that he is ‘a real party in … very important and critical respects’

    1. Moore-Bick LJ recently emphasised the continuing authority of this guidance in Deutsche Bank AG v Sebastian Holdings Inc [2016] EWCA Civ 23, [2016] 4 WLR 17 at [62]:

“As all three members of the court observed in Petromec, the exercise of the discretion is in danger of becoming overcomplicated by authority. The decision of the Privy Council in Dymocks, which contains an authoritative statement of the modem law, explains and interprets the Symphony guidelines in a way which reflects the variety of circumstances in which the court is likely to be called upon to exercise the discretion. … We think it important to emphasise that the only immutable principle is that the discretion must be exercised justly. It should also be recognised that, since the decision involves an exercise of discretion, limited assistance is likely to be gained from the citation of other decisions at first instance in which judges have or have not granted an order of this kind.”

    1. The principal area of dispute between the parties concerns the approach to be adopted in the case of an application against a non-party who was at the material times in control of an impecunious corporate party and caused it to bring or defend the proceedings in question. Counsel for Mr Bailey submitted that there was no jurisdiction, or if there was jurisdiction it should not be exercised, to make an order unless there was some divergence between the interests of the controller and the interests of the company, such that the bringing or defence of the proceedings had been in the interests of the controller rather than in the interests of the company. Counsel for SATV disputed this, and submitted that it was proper to make an order, in an appropriate case, where the interests of the controller were aligned with those of the company.
    2. Counsel for Mr Bailey relied in support of his submission in particular upon passages from two judgments in the early years of the non-party costs jurisdiction, namely those of Lloyd LJ in Taylor v Pace Developments Ltd [1991] BCC 406 at 409 and Millett LJ in Mettaloy Supplies Ltd v MA (UK) Ltd [1997] 1 WLR 1613 at 1619-20. As he acknowledged, however, this question was considered by Lord Brown in Dymocks, who quoted part of Millett LJ’s judgment among other authorities (Taylor v Pace was not cited). Lord Brown expressed the Privy Council’s conclusion at [29] as follows:

“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. Since then, there have been a number of decisions of the Court of Appeal in which this question has been discussed. It is not necessary to refer to all of them. In Goodwood Recoveries Ltd v Breen [2005] EWCA Civ 414, [2006] 1 WLR 2723 at [59]. Rix LJ said:

“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.”

    1. In Systemcare UK Ltd v Services Design Technology Ltd [2011] EWCA Civ 546, [2012] 1 BCLC 14 at [13] Lewison LJ commented on this passage:

“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.”

    1. In Threlfall v ECD Insight Ltd [2013] EWCA Civ 1444, [2014] 2 Costs LO 129 at [13] Lewison LJ added:

“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.”

    1. The conclusion that I draw from these authorities is that the court should be slow to make an order against the controller unless the controller has caused the company to bring or defend the claim in order to promote his own economic interests, as distinct from the interests of other shareholders and creditors of the company; but it is not necessary for the applicant to show that there is a divergence between his interests and those of the other stakeholders.
    2. I would add four points, none of which is in dispute. First, an order will more readily be made where the controller causes the company to bring a claim than where he causes it to defend a claim: see e.g. Goodwood v Breen at [48] (Rix LJ) and Sims v Hawkins [2007] EWCA Civ 1175, [2008] CP Rep 7 at [48] (Rix LJ).
    3. Secondly, as Lord Brown stated in Dymocks at [33]:

“The authorities establish that, whilst any impropriety or the pursuit of speculative litigation may of itself support the making of an order against a non-party, its absence does not preclude the making of such an order.”

    1. Thirdly, it was stated by Balcombe LJ in Symphony Group plc v Hodgson [1994] QB 193 that the applicant should “warn the non-party at the earliest opportunity of the possibility that he may seek to apply for costs against him”. That statement has to be viewed in the context in which it was made, however, which was one where the applicant had a valid cause of action against the non-party and could have joined him to the proceedings. As Moore-Bick LJ stated in Deutsche Bank at [32]:

“The importance of a warning will vary from case to case and may depend on the extent to which it would have affected the course of the proceedings: see per Lord Brown [in Dymocks] at para 31. If the third party against whom an order for costs is sought is the real party to the litigation, the absence of a warning may be of little consequence.”

    1. Lastly, causation is required “to some extent”, although a causal link with the non-recovery of costs by the applicant as opposed to the incurring of costs by the applicant may suffice: see Turvill v Bird [2016] EWCA Civ 703, [2016] BLR 522 at [28] (Hamblen LJ).

 

EXERCISING THE DISCRETION IN THIS CASE

The judge reviewed the history of the action and the result of the trial. When the defendants went into insolvency the claimants obtained further documentation and stated that they intended to pursue Mr Bailey personally.

THE JUDGMENT
    1. This application was launched by SATV on 3 August 2016 after SATV had obtained documents from WPMC’s liquidator. SATV first warned Mr Bailey that it intended to seek a costs order against him in a letter dated 7 July 2016.
Factors relied upon by SATV
    1. SATV rely upon four principal factors as justifying making a costs order against Mr Bailey, namely: (i) he stood personally to benefit from WPMC’s defence of SATV’s claims; (ii) he personally funded that defence; (iii) he exercised control over it; and (iv) he did so in circumstances where WPMC was insolvent. It is convenient to consider these factors in reverse order.
Insolvency
    1. Although Mr Bailey disputes that WPMC was insolvent, WPMC’s accounts for the years ending 31 May 2012, 31 May 2013 and 31 May 2014 show that it was balance sheet insolvent in each of those years and that its deficiency increased each year, albeit that the deficits were not large (£16,004 in 2014). Furthermore, it is clear that, had accounts been prepared for the year ending 31 May 2015, the deficit then would have been substantially larger. Thus the estimated statement of affairs as at 5 August 2015 shows a deficiency of £1,890,967. Mr Bailey’s point is that WPMC was able to pay its debts as they fell due down to 1 July 2015. Mr Bailey’s own evidence shows, however, that WPMC was only able to pay its debts because Mr Bailey provided it with the necessary financial support.
    2. WPMC’s deficiency of £1,890,967 is made up of four debts totalling £1,891,427 less cash at bank of £460. The four debts are as follows: £1.1 million to Firefly; £111,779 to DBE; £43,695 to Mr Hunt; and £635,953 to SATV.
    3. The role of Firefly in the exploitation of the Documentary is referred to in my judgment of 1 July 2015 at [44] and [77]. As explained there, the £1.1 million was an advance against royalties paid by Firefly to WPMC.
    4. According to the director’s report prepared for the creditors’ meeting on 5 August 2015:
“In April 2012 … Firefly purported to terminate its agreement with [lambic] as a result of which WPMC terminated its agreement with Firefly citing a repudiatory breach by Firefly and (in the alternative) giving notice pursuant to the Commercial Agents Regulations. Firefly did not accept the WPMC termination but no further action was taken by either side and WPMC regarded the agreement as determined.”
    1. Mr Bailey does not mention the dispute with Firefly in his evidence on this application. Taking the statement in the director’s report at face value, however, it appears that, although WPMC had received £1.1 million from Firefly by way of an advance, WPMC did not regard itself as liable to re-pay that sum and Firefly had made no attempt to recover it since April 2012.
    2. It follows that, apart from SATV, WPMC’s principal creditors as at 5 August 2015 were DBE and Mr Hunt, in both cases for work done or costs incurred in defending SATV’s claim.
Control
    1. There is no dispute that, from 4 January 2013 until 5 August 2015, Mr Bailey controlled WPMC, and in particular controlled its defence of SATV’s claim. Indeed, from at least 28 October 2013 to 18 May 2015, Mr Bailey acted in person on behalf of WPMC. Thereafter it was Mr Bailey who gave instructions to McFaddens and counsel on behalf of WPMC.
Funding
    1. There is no dispute that, although McFaddens and counsel represented WPMC at trial under the CFA, Mr Bailey partly funded WPMC’s defence of SATV’s claim. In particular, he paid the following sums:
i) The fees of McFaddens and counsel for the hearing before Newey J in the sum of £4,770.
ii) The fees of WPMC’s expert witness Prof Jaszi in the sum of $ 12,500 equating to £8,056.72.
iii) Video conferencing costs for Prof Jaszi’s evidence in the sum of £269.28.
iv) Trial transcription costs in the sum of £2,052.
v) A sum of £240 which appears to have been for translation.
    1. These sums total £15,388. In addition, Mr Bailey paid McFaddens the sum of £7,000 to enable the costs ordered by Newey J to be paid, but as a result of the winding-up of WPMC this money was not paid to SATV and instead was used to pay the liquidator’s fees. Furthermore, Mr Bailey supported the defence of the claim by providing his own time. Of the £111,779 claimed in DBE’s proof of debt, £79,400 was claimed for Mr Bailey’s services provided pursuant to the agreement of 1 June 2014.
Benefit
    1. SATV contend that Mr Bailey caused WPMC to defend SATV’s claim with a view to his personal benefit. This is disputed by Mr Bailey, who contends that he caused WPMC to defend the claim for the benefit of WPMC. Mr Bailey accepts that, to the extent that his interests were aligned with those of the company, then the defence of the claim was also for his benefit; but he contends that there was no divergence between his interests and those of the company.
    2. In my view it is clear that Mr Bailey caused WPMC to defend SATV’s claim with a view to his personal benefit (and the benefit of his fellow investors in GLE). As Mr Bailey accepts, he hoped that success in the litigation would lead to WPMC generating money from the Documentary, either by way of a settlement with SATV or by exploitation of the Documentary though Ace and Screenvision in the USA. As a matter of economic reality, no other stakeholders stood to benefit, because, once the small debts to Universal and the auditors had been paid, WPMC had no creditors other than those it incurred as result of the litigation. Nor did WPMC have any other substantial shareholders. Accordingly, from 4 January 2013 Mr Bailey was the real party to the claim.
Factors relied upon by Mr Bailey
    1. Apart from the points on benefit that I have already considered, the principal factors relied upon by Mr Bailey as rendering a non-party costs order against him unjust are (i) WPMC’s prospects of success, (ii) WPMC’s attempts to settle the claim, (iii) SATV’s motive for pursuing for claim and (iv) SATV’s failure to warn him that it might seek such an order prior to 7 July 2016.
WPMC’s prospects of success
    1. Mr Bailey relies upon the fact the WPMC was advised both before and after he took over control of it that it had good prospects of success. Prior to his taking over control, WPMC had been advised by two firms of solicitors that it had a good prospect of succeeding in its collateral contract case, and Prof Jaszi had provided a favourable opinion on the issues of public domain and fair use under US law. Subsequently, Mr Wilson QC advised WPMC that it had good prospects of success on its defences of collateral contract alternatively proprietary estoppel. Given that it is not necessary for SATV to show that Mr Bailey acted improperly, however, I consider that this factor is of little assistance to Mr Bailey.
WPMC’s attempts to settle the claim
    1. Mr Bailey relies upon the fact that he made an offer on behalf of WPMC to settle the claim in his letter dated 29 May 2014 and he responded constructively to SATV’s Part 36 offers. I do not consider that this factor assists Mr Bailey, however. He did not accept either of SATV’s Part 36 offers, and for the reasons given in my judgment dated 15 July 2015 I concluded that SATV had obtained a judgment which was at least as favourable as their offer of 4 July 2014.
SATV’s motive for pursuing the claim
    1. Mr Bailey points out that SATV incurred total costs of over £600,000 despite knowing that WPMC had no assets, as well as spending £25,000 on acquiring Iambic’s assets from its liquidator, and despite the offer he had made on behalf of WPMC on 29 May 2014. He argues that this shows that SATV’s purpose in pursuing the claim was to “thwart” the US proceedings.
    2. I do not accept the apparent suggestion that SATV behaved improperly in bringing this claim. SATV’s evidence is that their aim was to prevent any further exploitation of the Documentary in a manner which infringed SATV’s UK or US copyrights. That was an entirely legitimate objective. Furthermore, I am unimpressed by Mr Bailey’s reliance upon SATV’s failure to accept his offer of 29 May 2014 since that offer was evidently intended to enable future exploitation of the Documentary in the USA, as is confirmed by the fact that Mr Bailey did not either accept SATV’s Part 36 offer of 4 July 2014 or (as discussed in my judgment of 15 July 2015) make an acceptable counter-offer.
    3. What can fairly be said is that SATV pursued their claim in circumstances where they either knew or should have appreciated that WPMC would be unlikely to be able to pay their costs and where its only apparent asset was its rights in the Documentary.
The absence of warning
    1. Mr Bailey says that, if he had been warned prior to the trial that SATV would seek a non-party costs order against him, then he would have either put WPMC into liquidation or accepted one of SATV’s settlement offers. Secondly, he says that, if he had been warned after the trial, he would have tried to raise funds to enable an appeal to be pursued. In that regard, he relies upon the fact that Mr Wilson QC was prepared to act on the appeal under a CFA. By 7 July 2016, however, WPMC was long out of time for filing an appellant’s notice.
    2. SATV’s explanation for their delay in making the application is that, after WPMC was placed in liquidation, it took SATV some time to obtain information about WPMC’s affairs and Mr Bailey’s involvement in them. At a meeting of creditors on 18 August 2015 SATV supported the appointment of an alternative liquidator in place of the one originally appointed. The new liquidator called a further meeting of creditors on 22 September 2015 and interviewed Mr Bailey in October 2015. Although SATV’s solicitors requested copies of DBE’s proof of debt and supporting documents on 10 November 2015, these were not provided until 20 April 2016. This chronology explains why SATV delayed in making the application after WPMC was wound up, but it does not explain why SATV failed to warn Mr Bailey that it might make such an application prior to that.
    3. It is therefore necessary to consider what difference it would have made if SATV had warned Mr Bailey. I do not doubt the honesty of Mr Bailey’s evidence that he would have acted in the way that he now says that he would have. That evidence has inevitably been given, however, with the benefit of 20/20 hindsight. I do not accept that it necessarily reflects how Mr Bailey would actually have acted without the benefit of hindsight.
    4. So far as the period up to trial is concerned, as discussed above, it is Mr Bailey’s own evidence that, although he considered putting WPMC into liquidation in August 2014, he did not do so because he hoped that it would profit from a favourable outcome from the US case which at that stage he believed would reach trial first and that, although he again considered putting WPMC into liquidation when he received FAF’s letter dated 20 April 2015, he did not do so because he received favourable advice from Mr Wilson QC and because McFaddens and Mr Wilson QC were prepared to act under a CFA.
    5. As noted above, it is apparent from the CFA that Mr Bailey was advised as to the possibility of obtaining ATE insurance to cover SATV’s costs, but did not do so. There is no evidence as whether or not Mr Bailey either asked for or was given advice as to the remedies that would be open to SATV if no ATE cover was obtained but WPMC lost. In those circumstances I will assume that Mr Bailey did not ask for such advice nor was any volunteered. If Mr Bailey had asked for advice, I am sure that he would have been appropriately advised.
    6. I am not convinced that, if SATV had warned Mr Bailey that they might seek a costs order against him, Mr Bailey would have acted any differently. Mr Bailey’s actions were motivated by the prospect of recouping some of the money he and his fellow investors in GLE had lost, by the advice he had received as to WPMC’s prospects of success and by the fact that McFaddens and Mr Wilson QC were prepared to act under a CFA. None of those factors would have been changed by a warning from SATV. Mr Bailey says that the fact that he did not fund WPMC’s defence of the claim beyond the limited extent set out above demonstrates that he was not willing to hazard his own money on the matter, but I do not accept that Mr Bailey would have seen the matter in that light at the time, given the factors I have mentioned.
    7. As for the position after 1 July 2015, I do not consider that Mr Bailey would have acted differently then either. Although Mr Wilson QC has given evidence that he would have acted on any appeal under a CFA, there is no equivalent evidence from McFaddens. Moreover, although Mr Bailey recognises that he would have had to pay at least the interim costs ordered, what he fails to recognise is that he would also have had to provide security for SATV’s costs of the appeal. I am not persuaded that Mr Bailey would have done so. Furthermore, I am not persuaded that an appeal would have succeeded. I granted permission on the basis that an appeal had a real prospect of success, but that does not mean that it was likely to succeed.
Conclusion
  1. In my judgment, the factors relied upon by SATV point to the conclusion that it would be just to require Mr Bailey to pay SATV’s costs from 4 January 2013 and none of the factors relied upon by Mr Bailey support the opposite conclusion. I conclude that this is an exceptional case in the sense explained in Dymocks: Mr Bailey was the real party since he controlled and partly funded the defence of WPMC’s claim with a view to his own benefit, and therefore it is right that he should pay the costs which SATV incurred as a result.

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