Taking a fresh look at non-party costs orders

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The Court of Appeal has reviewed the jurisdiction to make costs orders against non-parties under section 51 of the Senior Courts Act 1981 twice this year already.

The Court of Appeal has reviewed the jurisdiction to make costs orders against non-parties under section 51 of the Senior Courts Act 1981 twice this year already. In Legg v Sterte Garage Ltd an order for costs was made against the defendant’s public liability insurers and in Deutsche Bank A.G. v Sebastian Holdings Inc an order was made against the sole director and shareholder of the defendant company.

The statutory discretionary jurisdiction to order a non-party to pay costs was first exercised by the House of Lords in 1985 in Aiden Shipping Co Ltd v Interbulk Ltd. In Deutsche Bank the court commented on the fact that the guidelines it gave in 1993 in Symphony Group Plc v Hodgson were formulated at a time when applications for costs against third parties were relatively uncommon. Since then applications have been made in a wide variety of circumstances and it is time to realise that the Symphony guidelines did not lay down rules, that the exercise of the discretion is in danger of becoming over-complicated by authority and that each case turns on its facts.

We outline the circumstances in which an order is likely to be made below and comment upon the Court of Appeal’s latest decisions.

General principles

The starting point for the guidelines governing the exercise of the section 51 discretion is Symphony Group Plc v Hodgson, as explained and interpreted by the Privy Council in 2004 in Dymocks Franchise Systems (NSW) Pty Ltd v Todd. 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.

Where, however, the non-party not merely funds the proceedings but substantially also controls or benefits from them, it will usually be fair for the non-party to pay the successful party's costs. In Deutsche Bank, the Court of Appeal stressed that each case turns on its facts and the only immutable principle is that the discretion must be exercised justly. The absence of a warning to the non-party is simply one factor which the court will take into account.

Exceptions

Generally speaking the discretion will not be exercised against "pure funders" - family members, friends or philanthropists 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 (Hamilton v Al Fayed No 2). The same applies to solicitors who fund disbursements in claims funded by a conditional fee agreement without after the event insurance but do not step outside the normal role of a solicitor (Flatman v Germany and Heron v TNT (UK) Limited).

Professional funders

A professional funder who finances part of a claimant’s cost of litigation is potentially liable for the costs of the opposing party, but only to the extent of the funding provided (Arkin v Borchard Lines Ltd). Where a professional funder supported a case that failed comprehensively because it was wholly bad in law, and where it was fair for the claimant to pay the defendant's costs on the indemnity basis, the funder was ordered to bear the defendant's costs assessed on the indemnity basis, subject to the Arkin cap (Excalibur Ventures LLC v Texas Keystone Inc).

Company directors and shareholders

If a non-party promotes and (usually although not necessarily) funds proceedings by an insolvent company solely or substantially for their own financial benefit and not for that of the company, they should generally be liable for the costs if their claim, defence or appeal fails (Dymocks). However, an order will not be made against a major shareholder or dominant director in a company without something additional such as a fresh injection of capital to fund the litigation. The individual must be, in effect, the real party to the litigation.

In Deutsche Bank, the defendant company’s sole director Mr Vik had used the company as his personal trading vehicle to hold and dispose of funds on his behalf as he saw fit. He had transferred large sums from the company to himself shortly before the proceedings which left the company unable to satisfy Deutsche Bank’s judgment. His conduct and control of the case, which involved the fabrication of evidence, was described as reprehensible. He had put himself forward as a witness of truth and could not say that his evidence would have been different had he known that he might be personally liable for the bank's costs.

In these circumstances, it was fair for Mr Vik to be bound by the findings against the company and for an order for costs to be made against him even though he had been a witness, no application for security for costs had been made against him in respect of the defendant company’s counterclaim and he had not been warned of the possibility of an application under section 51.

Orders against insurers

The Court of Appeal has identified the following five factors that must be present before it will be appropriate to order the defendant’s insurers to pay the claimant's costs: 

  1. The insurers funded the defence. 
  2. The defence failed in its entirety. 
  3. The insurers, rather than the defendant, determined to defend the claim. 
  4. The insurers had the conduct and control of the litigation. 
  5. The insurers fought the claim exclusively (or predominantly) to defend their own interests.

The five factors are only likely to be present in a relatively rare class of cases. This is particularly the case with professional indemnity insurance since concern about the insured’s reputation will usually indicate that the insurers were also acting in the insured's interest. The relevant Court of Appeal decision is TGA Chapman v Christopher, as clarified by Citibank SA v Excess Insurance Co Ltd, Cormack v Excess Insurance Co Ltd and Palmer v Palmer.

The decision in Legg

The claims in Legg v Sterte Garage Ltd alleged negligence and nuisance in connection with leakages of diesel oil from the defendant’s garage. When the proceedings were begun in 2008, the claimants alleged that damage had been caused by a significant spillage from an overground storage tank that had occurred in 1997. Subsequently they claimed that there had also been longer term leakages from underground storage tanks and pipework.

Following an unsuccessful attempt to strike out the claims in 2010, it became clear that the 1997 spillage was unlikely to be the cause of the contamination complained of. Since the policy only covered pollution "caused by a sudden identifiable unintended and unexpected incident which occurs in its entirety at a specific time and place during the period of insurance," the insurers withdrew their support of the defence. The defendant was insolvent by this stage and asserted no grounds for defending the claims with the result that judgment was entered against it.

The court found that the insurers’ purpose in defending the claim was not to protect the defendant against an award of damages it would have been unable to meet but to seek to defeat a claim which as originally pleaded fell within the narrow class of polluting incidents covered by the policy. The insurers had no interest in defending the claim if and to the extent that it was based on any other polluting causes, that is the longer term leaks.

It was fair to order the insurers to pay the claimants’ costs under section 51 because had they not defended the claim until 2010, the defendant’s precarious financial state meant that it would not have done so. The claimants would have avoided the bulk of the costs they had to incur if the insurers had not defended the claim for their own purposes in order to avoid a claim falling within the cover provided by the policy. The court also held, obiter, that the insurers were liable for the defendant’s costs liability to the claimant under the Third Parties (Rights against Insurers) Act 1930.

Comment

These decisions suggest that costs orders against non-parties who have controlled the litigation for their own benefit are likely to be simpler to obtain in future. The Court of Appeal has made it clear that the discretion to make such an order can be exercised in the interests of justice without a painstaking analysis of facts and principles from previous cases. The Symphony guidelines are merely that and are not requirements to be satisfied by the successful party.

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