An area of costs practice which is becoming increasingly overloaded with authority is the jurisprudence governing applications for non party costs Orders.
Such applications arise in a number of contexts: they may be made against directors of insolvent companies which are unable to pay costs awards against them, against funders of litigation, who may have funded litigation for a variety of reasons or in a variety of ways, insurance companies and credit hire organisations, and also, increasingly solicitors.
This latter category of case is likely to increase as defendants in personal injury cases, come up with ever more cunning plans to circumvent the QUOCS scheme and to seek recovery of costs from the deep pockets of a solicitor’s professional indemnity insurer.
The practical context of the burgeoning number of authorities, particularly at appellate level, is an increased burden of research when advising upon and arguing an application.
The recent authority of Deutsche Bank v Sebastian Holdings and Alexander Vik [2016] EWCA Civ 23 is accordingly of interest, as it signals a desire at appellate level to return to simplicity in setting out the criteria governing when such an order should or should not be made. The case also re-iterates the policy underlying the jurisdiction, which cuts across such concepts as limited liability, the order piercing the corporate veil to make an owner or officer of a company personally liable for the costs liabilities of a limited company.
A copy of the judgment can be found here: Deutsche Bank v Sebastian Holdings [2016] EWCA Civ 23
The facts of the case can be briefly drawn from paragraphs 2 and 3 of the judgment of the Court of Appeal:
2. The background to the appeal lies in proceedings between the Bank and Sebastian relating to the operation of accounts maintained by Sebastian with the Bank for trading in foreign currencies, shares and financial products. Except to the limited extent identified later in this judgment, it is unnecessary for present purposes to describe the course of dealing on the accounts or the relationship between the parties, other than to say that in January 2009 the Bank began proceedings against Sebastian in this country to recover the sum of approximately US$250 million due principally in respect of amounts owed on the closing out of various trading positions. Sebastian brought a counterclaim against the Bank for approximately US$8 billion in respect of the losses it alleged it had suffered as a result of the Bank’s breaches of contract in forcing it to close out certain open positions contrary to its wishes. In November 2013, after a trial lasting 44 days, Cooke J. gave judgment for the Bank on its claim in the sum of US$243,023,089 and dismissed Sebastian’s counterclaim. The judge also ordered Sebastian to pay 85% of the Bank’s costs, which are said to amount to about £60 million, on the indemnity basis. We shall refer to the proceedings between the Bank and Sebastian as “the main action”.
3. The appellant, Mr. Alexander Vik, was at all material times the sole shareholder and sole director of Sebastian, a company incorporated in the Turks and Caicos Islands which he used as a personal investment vehicle. Sebastian, which is now said to have no assets, failed to make any payment in respect of the judgment or the Bank’s costs and the Bank therefore applied to join Mr. Vik as a defendant with a view to obtaining an order that he pay the costs of the proceedings himself. The application was made on the basis that Mr. Vik owned and controlled Sebastian, that he had directed the litigation on its behalf, that he had funded the litigation, or had made funds available to enable Sebastian to pursue it, that it had been conducted for his personal benefit and that therefore he was the “real party” to the litigation. After a two-day hearing, at which Mr. Vik was represented by Leading and Junior Counsel, Cooke J. made the order to which we have referred. The order did not expressly state that the sum of £36,204,891 was to be paid on account of the Bank’s costs, but it is clear from the opening paragraph of his judgment that that was what the judge intended.
The Court of Appeal considered some guidance that had been formulated in the early years of the development of the non party costs jurisdiction:
14. In Aiden Shipping v Interbulk (The ‘Vimeira’) [1986] A.C. 965 the House of Lords held that section 51 gives the court jurisdiction to make orders for costs against persons other than parties to the proceedings, subject to any restrictions that might be imposed by rules of court. The decision thus opened the way for orders for costs to be made against third parties when their connection with the proceedings makes it just and equitable to do so. In Symphony Group Plc v Hodgson the plaintiff, a manufacturer of kitchen units, employed the defendant on terms under which he agreed not to engage in the manufacture or supply of kitchen furniture for a year after leaving its employment. Having left the plaintiff’s employment, the defendant immediately took a job with a competitor, Halvanto Kitchens Ltd. The plaintiff commenced proceedings seeking damages and an injunction. The defendant obtained legal aid and was represented under his legal aid certificate by the solicitors who acted for Halvanto. The trial judge found in favour of the plaintiff and made an order for costs against Halvanto, but this court set aside the order on the grounds that it was unfair to Halvanto, which had taken no part in the proceedings. It held that Halvanto could have been made a party to the proceedings, that it had been disadvantaged by the failure to warn it that an application for costs might be made against it and that its connection with the original proceedings was not close enough to justify admitting the judge’s findings of fact as evidence on the application for costs.
15. The case was cited to us principally for the guidance given in the judgment of Balcombe L.J., with whom Staughton and Waite L.JJ. agreed and in view of the importance which Mr. Cogley attached to it at various points in his argument, we think it appropriate to set it out in full. It runs as follows (pages 192H-194D):
“(1) An order for the payment of costs by a non-party will always be exceptional: see per Lord Goff in Aiden Shipping Co. Ltd v Interbulk Ltd [1986] A.C. 965, 980F. The judge should treat any application for such an order with considerable caution.
(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. Joinder as a party to the proceedings gives the person concerned all the protection conferred by the rules, as to e.g. the framing of the issues by pleadings; discovery of documents and the opportunity to pay into court or to make a Calderbank offer (Calderbank v Calderbank [1976] Fam. 93); and the knowledge of what the issues are before giving evidence.
(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 under Ord. 15, r.6(2)(b)(i) or (ii).
Principles (2) and (3) require no further justification on my part; they are an obvious application of the basic principles of natural justice.
(4) An application for payment of costs by a non-party should normally be determined by the trial judge: see Bahai v Rashidian [1985] 1 W.L.R.1337.
(5) The fact that the trial judge may in the course of his judgment in the action have expressed views on the conduct of the non-party constitutes neither bias nor the appearance of bias. Bias is the antithesis of the proper exercise of a judicial function: see Bahai v Rashidian [1985] 1 W.L.R.1337, 1342H, 1346F.
(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. Thus, subject to any relevant statutory exceptions, judicial findings are inadmissible as evidence of the facts upon which they were based in proceedings between one of the parties to the original proceedings and a stranger: see Hollington v F. Hewthorne & Co. Ltd [1943] K.B. 587; Cross on Evidence, 7th ed. (1990), pp. 100-101. Yet in the summary procedure for the determination of the liability of a solicitor to pay the costs of an action to which he was not a party, the judge’s findings of fact may be admissible: see Brendon v Spiro [1938] 1 K.B. 176, 192, cited with approval by this court in Bahai v. Rashidian [1985] 1 W.L.R. 1337, 1343D, 1345H. This departure from basic principles can only be justified if the connection of the non-party with the original proceedings was so close that he will not suffer any injustice by allowing this exception to the general rule.
(7) Again, the normal rule is that witnesses in either civil or criminal proceedings enjoy immunity from any form of civil action in respect of evidence given during those proceedings. One reason for this immunity is so that witnesses may give their evidence fearlessly: see Palmer v Durnford [1992] Q.B. 483, 487. In so far as the evidence of a witness in proceedings may lead to an application for the costs of those proceedings against him or his company, it introduces yet another exception to a valuable general principle.
(8) The fact that an employee, or even a director or the managing director, of a company gives evidence in an action does not normally mean that the company is taking part in that action, in so far as that is an allegation relied upon by the party who applies for an order for costs against a non-party company: see Gleeson v J. Wippell & Co. Ltd [1977] 1 W.L.R. 510, 513.
(9) The judge should be alert to the possibility that an application against a non-party is motivated by resentment of an inability to obtain an effective order for costs against a legally aided litigant. The courts are well aware of the financial difficulties faced by parties who are facing legally aided litigants at first instance, where the opportunity of a claim against the Legal Aid Board under section 18 of the Legal Aid Act 1988 is very limited. Nevertheless the Civil Legal Aid (General) Regulations 1989 (S.I. 1989 No. 339/89, and in particular regulations 67, 69, and 70, lay down conditions designed to ensure that there is no abuse of legal aid by a legally assisted person and these are designed to protect the other party to the litigation as well as the Legal Aid Fund. The court will be very reluctant to infer that solicitors to a legally aided party have failed to discharge their duties under the regulations – see Orchard v South Eastern Electricity Board [1987] Q.B. 565 – and in my judgment this principle extends to a reluctance to infer that any maintenance by a non-party has occurred.”
16. Staughton L.J. said at page 196:
“Neither Mr. Bramley nor Halvanto had any warning that questions which would tend to make out such a case would be asked. Neither had reason to obtain professional advice on the topic before Mr. Bramley gave evidence. Neither was represented by counsel at the trial, who might, for example, have asked further questions in re-examination. The main purpose of pleadings is to inform one party of the case which the other will seek to make against him. That is an essential feature of justice, and was entirely absent here.
Nevertheless, there are cases, as Balcombe L.J. has shown, where a person may be ordered to pay costs on the basis of evidence given and facts found at a trial to which he was not a party. Before such an order is made, it must be just and fair that the stranger should be bound by that evidence and those findings. In my judgment that is not the case here. My second reason is that the deputy judge’s findings were reached without the assistance of submissions from counsel representing Halvanto, or of any further evidence that Halvanto might have called.”
Plainly in the view of the Court of Appeal in Deutsche Bank, the law had moved on in the twenty or so years, since these guidelines had been formulated:
17. A number of points emerge from that case. First, we think it is clear that all three members of the court assumed that the procedure to be adopted for deciding whether a third party should bear all or part of the costs of the litigation should be summary in nature, in the sense that the judge would make an order based on the evidence given and the facts found at trial, together with his assessment of the behaviour of those involved in the proceedings. Second, in order to justify the adoption of a summary procedure the third party must have had a close connection of some kind with the proceedings. Staughton and Balcombe L.JJ. both emphasised that the court should not make an order for costs against a third party unless it is just and fair that he should be bound by the evidence given at trial and the judge’s findings of fact. Whether that is so in any given case will depend on the nature and degree of his connection with the proceedings.
18. Third, we do not think that the court was seeking to do more than provide an indication of the kind of factors that judges should take into account, as appropriate in the particular cases before them, when asked to make an order of this kind. Factors such as failing to join the person concerned as a party to the proceedings or failing to warn him that an application for costs may be made against him may in some cases weigh heavily against adopting a summary procedure, but each case has to be considered on its own merits in order to ascertain whether the third party will suffer an injustice if he is held bound by the evidence and findings at the trial. Decisions made on applications of this kind since Symphony v Hodgson, to many of which we were referred, only serve to illustrate the wide range of circumstances in which orders for costs have been sought and made against third parties.
19. In Dymocks Franchise Systems (NSW) Pty Ltd v Todd [2004] UKPC 39, [2004] 1 W.L.R. 2807 the Privy Council awarded the successful petitioner its costs, but since the respondents were unable to pay them, the petitioner applied for an order that they be paid by a third party, a company associated with one of the respondents which had promoted and funded the appeal substantially for its own benefit. Giving the judgment of their Lordships Lord Brown of Eaton-under-Heywood said:
“25. A number of the decided cases have sought to catalogue the main principles governing the proper exercise of this discretion and their Lordships, rather than undertake an exhaustive further survey of the many relevant cases, would seek to summarise the position 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] Q.B. 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 the Knight case 174 CLR 178 and Millett LJ’s judgment in Metalloy Supplies Ltd v MA (UK) Ltd [1997] 1 W.L.R. 1613. Consistently with this approach, Phillips LJ described the non-party underwriters in T G A Chapman Ltd v Christopher [1998] 1 W.L.R. 12, 22 as “the defendants in all but name”.”
20. A little later, summarising the principles to be derived from those and other authorities, he said:
“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.”
21. These principles have been applied in a number of subsequent cases, but it is unnecessary to consider them in detail because they all turn to a greater or lesser degree on their own facts. When an order for costs is sought against a third party, the critical factor in each case is the nature and degree of his connection with the proceedings, since that will ultimately determine whether it is appropriate to adopt a summary procedure of the kind envisaged in the authorities, leading to what Neuberger L.J. in Gray v Going Places Leisure Travel Ltd [2005] EWCA Civ 189 described as “the overall order made by the court at the conclusion of the trial.” It is important to note, however, that, contrary to Mr. Cogley’s submission, the guidance given in Symphony v Hodgson has not been regarded as immutable, but has been developed and modified in subsequent cases to reflect the differing circumstances under which applications for orders of this kind have been made.
22. As the judge noted in paragraph 9 of his judgment, an application under section 51 does not involve the assertion of a cause of action; it is a request for the court to exercise a statutory discretion in relation to the costs of proceedings before it. Section 51 is now the source of the court’s discretion to determine who shall bear the costs of proceedings, whether they are parties to the proceedings or third parties. In principle, therefore, one would expect the procedure in each case to be substantially the same and the order to reflect broadly similar matters, such as the conduct of the proceedings and the nature of the party’s or third party’s involvement. In our view there is a clear distinction to be drawn between the process by which the court makes an order for costs at the conclusion of a trial, whether that order involves the parties alone or one or more persons who are not parties, and separate proceedings against a third party consequent upon the outcome of the trial. In the former case, the ordinary rules of evidence do not apply, precisely because the person against whom an order for costs is sought has had a sufficiently close connection with the proceedings to justify the court’s treating him as if he were a party.
The Court of Appeal further commented on the suggestion that a warning should be given of the possibility of an application for a costs order to a non party in these terms:
31. It is worth remembering that the Symphony guidelines as a whole were formulated in the context of an attempt by the plaintiff to obtain an order for costs against a third party whose connection with the proceedings was fairly tenuous. The second and third guidelines are concerned with ensuring that such a person has a fair opportunity to deal with any allegations that may affect his liability for costs before the judge makes his findings. They are not ostensibly directed to a case such as the present, in which an order for costs is sought against a third party who can properly be regarded as the real party to the litigation. The truth is that Mr. Vik had every opportunity to contest the Bank’s factual and legal case and took full advantage of it. We agree with the judge, therefore, that the only advantage that a warning could have given him would have been an opportunity to reconsider his own position in relation to the proceedings.
Interestingly the Court of Appeal doubted the correctness of certain dicta of Arden LJ, which had been interpreted in some quarters to provide an “out” for directors or officers who give evidence in proceedings:
42. Mr. Cogley submitted that to make an order for costs against Mr. Vik in the circumstances of this case would infringe the principle of witness immunity, as foreshadowed in the seventh of the Symphony guidelines, and in support of that argument he drew our attention to the decision of this court in Oriakhel v Vickers [2008] EWCA Civ 748. The case concerned a claim for damages alleged to have been suffered in a motor accident, but the defendant’s insurer had succeeded in proving at trial that the claimant and the defendant had concocted the claim, which was entirely spurious. The claimant had called as a witness a Mr. Khan, who claimed that he owned a garage, knew the defendant and had arranged for the damaged car to be brought in. The judge found that Khan was closely associated with the defendant and had given false evidence, but was not sure that he had been the mastermind behind the claim.
43. After the evidence had been closed the insurers informed Khan that they would apply for an order that he should pay the costs of the action on the grounds that he had been involved in setting up and running the claim. The judge declined to make such an order. He was not satisfied that Khan had funded or controlled the litigation, which he thought was a pre-requisite to making an order of that kind. This court held that to have been wrong and proceeded to exercise the discretion afresh, but it too decided that it should not make an order for costs against him. The leading judgment was given by Jacob L.J. He declined to make an order because he considered that Khan could have been joined as a defendant to an allegation of conspiracy and would then have been better able to protect his position. Also, he did not consider that Khan had had a sufficiently close connection with the proceedings to make it just to hold him bound by the judge’s findings of fact. Arden L.J. agreed with Jacob L.J., but added that to make an order for costs against Khan in the circumstances of that case would have infringed the law on witness immunity. Jacob L.J. agreed with those observations and Sir Anthony Clarke M.R. agreed with both judgments.
44. It is clear from paragraph 36 of the judgment in that case that the question whether to make an order for costs against a witness as a result of his evidence would infringe the law relating to witness immunity had not been the subject of argument. In our view Arden L.J.’s observations are obiter and should be treated with caution. They also have to be understood in the context of the case then before the court. Khan had not funded and controlled the litigation for his own benefit and so could not be regarded as the real party to the proceedings. Moreover, it was clearly open to the court to conclude that his involvement in them was not sufficiently close to justify holding him bound by the judge’s findings of fact. It is necessary to bear in mind that when making an order for costs the court is exercising a discretion, not giving effect to legal rights and obligations, but having said that, we consider it important for it to respectthe principles underlying witness immunity. In Symphony v Hodgson the court in its seventh guideline appears to have recognised that there may be cases in which it will be just to make an order for costs (not necessarily the whole costs of the action) against a witness and we do not think that the possibility should be excluded. The power to make such an order should, however, be exercised with considerable care. To make an order for costs against a witness simply because he has given false evidence might well infringe the principles of witness immunity, but to make such an order on the grounds that he had conspired with others to pursue a claim that was entirely fabricated would not, even if in order to support it he had given false evidence. We do not understand the court to have suggested otherwise; indeed Arden L.J. herself in paragraph 37 appears to have recognised that to be the case.
The Court of Appeal also emphasised the philosophical underpinning of the jurisdiction, where economic reality was found to cut across such norms as limited liability:
50. Mr. Cogley objected to this kind of analysis on the grounds that it amounts to piercing the corporate veil and treating Sebastian and Mr. Vik as one person. In one sense that might appear at first sight to be true, but it is necessary to bear in mind that on an application of this kind the court is not concerned with legal rights and obligations but with a broad discretion which it will seek to exercise in a manner that will do justice. In Threlfall v ECD Insight Ltd [2013] EWCA Civ 1444 Lewison L.J. said:
“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 theproposition that the non-party has no substantive liability in respect of the cause of action in question.”
51. It is for that reason that, in appropriate circumstances, the court may find that the third party is the real party to the litigation because he is controlling, and perhaps funding, the litigation and conducting it for his own benefit rather than that of the nominal party to the proceedings. Although the court will not ignore the corporate structure, it is entitled when exercising its discretion in relation to costs to have regard to considerations of that kind.
Finally in a postscript, the Court of Appeal observed:
61. It will be apparent from what we have said that Mr. Cogley sought to place great emphasis on the Symphony guidelines to the point of treating them, in particular the third guideline, as laying down requirements that must be satisfied unless the applicant can demonstrate a good reason for failing to do so. In our view that is not the correct approach. When considering those guidelines it is important to bear in mind that they were formulated not very long after the decision in Aiden Shipping v Interbulk, at a time when applications for costs against third parties were relatively uncommon, and that they were intended merely to provide guidance, not to lay down rules. Since then there have been many more applications for orders for costs against third parties under a wide variety of circumstances, as a result of which it has come to be recognised more clearly than perhaps it was at that time that each case turns on its own facts.
62. As all three members of the court observed in Petromec v Petrobras, the exercise of the discretion is in danger of becoming over-complicated by authority. The decision of the Privy Council in Dymocks, which contains an authoritative statement of the modern 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. Thus, the Privy Council has explained that an order of this kind is “exceptional” only in the sense that it is outside the ordinary run of cases where parties pursue or defend claims for their own benefit and at their own expense. Similarly, it has made it clear that the absence of a warning is simply one factor which the court will take into account in an appropriate case when deciding whether, viewed overall, it would be unjust to exercise the discretion in favour of making an order for costs against the third party. 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.
