In this article Richard Gray Barrister looks at the courts power to issue costs against a non-party; that is a party who is not directly involved in the litigation. Such orders may be considered against directors of an impecunious company formed only to protect the real litigators by the proposed use of the Company to litigate the claim.
The Statutory basis and the overall grounds for the award
Section 51 of the Senior Courts Act 1981, which is governed by CPR 46.2, gives the court power to award a non-party costs order. The award can be made in any court and the court is asked to exercise its jurisdiction to make it.
Generally, the only criterion for its application is whether, in all the circumstances, it is just to make the order. This is fact specific in each case.
Considerations for the Court to make the order
The court must consider whether the non-party is the (real) party interested in the outcome of the litigation, or
(i) whether they have been responsible for bringing the proceedings; and
(ii) that those proceedings were brought in bad faith; or
(iii) there is some other conduct, which in all the circumstances, justifies the court in making the order.
It is not enough simply that the non-party is the sole director and controlling mind of a company. If, however, the interests of a company and its director were so close, it could be considered just to make the order against the director personally, the court will do so. Again, much is fact dependent and needs to be considered during the litigation.
If the non-party acted without impropriety or on legal advice, this does not prevent an order being made against them. However, a non-party costs order may be more likely to be made when the applicant can show improper conduct of litigation. See Turvill v Bird and others [2016] EWCA Civ 703
- It will be exceptional for an order for costs to be made against a non-party where the applicant has a cause of action against the non-party and could have joined them as a party to the original proceedings.
- There must be a costs order made against the primary party and there is no power to order the non-party to pay costs beyond those ordered to be paid by the claimant or defendant in the particular litigation.
Litigation Funders for Claimants
Generally, the jurisdiction will not be exercised against litigation funders meaning “those with no personal interest in the litigation, who do not stand to benefit from it and in no way seek to control its course.” (Hamilton v Al Fayed and others [2002] EWCA Civ 665)
Conversely however, there is authority to say that such orders can be issued against third-party funders who fund defences. See Merchantbridge & Co v Safron General Partner & another [2011] EWCH 1524.
Note however that if the funder effectively controls or participates in it, then they may be liable. See the case of Arkin v Borchard Lines Ltd and others [2005] EWCA Civ 655
Causation
This is by no means settled law and the review of the authorities as to its necessity is beyond the scope of this article.
In Byrne v South Sefton Health Authority [2001] EWCA Civ 1904 the court said that it was necessary to determine whether the conduct complained of was really an effective cause of the costs incurred.
Generally, if there is no causation, whilst it may be possible to obtain the order, the granting of such orders will be rare.
An Application for Security for Costs – is it a prerequisite to the making of the order?
In any proposed litigation brought by a Company, a seasoned litigator would apply for security for their clients costs pursuant to CPR 25.
Those considerations will be the subject of a separate article given the litigation Our Clients are threatened with currently.
Principles that the Court will consider in granting the order against a director
The court will consider the following non-exhaustive) principles:
(i) Despite not being a party to the litigation, does the court consider that the non-party director properly be described as ‘the real party to the litigation’
(ii) Where proceedings by an insolvent company are funded by a non-party solely or substantially for their own financial benefit, they should be liable for the costs, if the action brought or defended fails.
(iii) To succeed impropriety need not be shown.
Section 51 orders may be made to avoid the injustice of an individual director hiding behind a Company and engaging in what they see as risk-free litigation for his own purposes (Re North West Holdings PLC and another [2001] EWCA Civ 67).
Such orders will not be made however where the Director is acting in proceedings to, for example protect shareholders. Of note here is that where a liquidator brings proceedings, the court will not usually make such an order.
In order to assess whether the director was the real party to the litigation, the question will be whether the individual director was seeking to benefit personally from the litigation.
It follows therefore, that before embarking upon funding of such litigation parties and their advisors are warned to consider whether in doing so, they are placing themselves at risk of being the recipient of such an order.
Conclusion
The courts power to award costs against non-parties is a significant incentive to dissuade others to encourage risky litigation. Where claims are made by Companies, litigators instructed to defend such claims should consider this power early in the proceedings and warn the other side in any pre-action correspondence.
If you require more information or are think of instructing a firm to act for you or your Company in litigation, then please email clerks@elysium-law.com or visit our website.