Non party costs orders considered

The non party costs jurisdiction is, from a professional and academic viewpoint one of the more interesting areas of costs work. It involves wide ranging consideration of a disparate body of case law decided in a variety of contexts and then its application to the facts of a particular case. Such applications are often very hard fought: the success or failure of an application may result in the insolvency of a party, or render otherwise “successful” litigation an expensive waste of time.

The starting point is the statute which confers a discretionary power to order costs upon the courts, the Senior Courts Act 1981. Section 51 provides:

(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—

(a)the civil division of the Court of Appeal;

(b)the High Court; and

(ba)the family court;

(c) the county court,

shall be in the discretion of the court.

(2)Without prejudice to any general power to make rules of court, such rules may make provision for regulating matters relating to the costs of those proceedings including, in particular, prescribing scales of costs to be paid to legal or other representatives or for securing that the amount awarded to a party in respect of the costs to be paid by him to such representatives is not limited to what would have been payable by him to them if he had not been awarded costs.

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

(emphasis added)

It is subsection (3) which has permitted this jurisdiction to emerge, beyond the normal course of deciding where costs lie between the parties to the action.

Rule 46.2 CPR is a rule made under the statute concerned with non party costs. It is silent about the basis upon which such an order may be made.

(1) Where the court is considering whether to exercise its power under section 51 of the Senior Courts Act 1981 (costs are in the discretion of the court) to make a costs order in favour of or against a person who is not a party to proceedings, that person must –

(a) be added as a party to the proceedings for the purposes of costs only; and

(b) be given a reasonable opportunity to attend a hearing at which the court will consider the matter further.

(2) This rule does not apply –

(a) where the court is considering whether to –

(i) make an order against the Lord Chancellor in proceedings in which the Lord Chancellor has provided legal aid to a party to the proceedings;

(ii) make a wasted costs order (as defined in rule 46.8); and

(b) in proceedings to which rule 46.1 applies (pre-commencement disclosure and orders for disclosure against a person who is not a party).

The Practice Direction (46) is silent upon this rule.

The non party costs jurisdiction is a difficult concept: we do not have “non party damages orders” and it’s existence represents a pragmatic compromise between the competing legal principles of limited liability and separate legal personality on the one hand, and the policy consideration that these principles should not defeat a successful litigant’s claim for costs by limiting them to a costs order against a nominal, possibly insolvent party, when the real party to the litigation able to pay those costs.

The caselaw, though running into thousands of pages at appellate level alone, is in essence is no more than the court’s demonstrable attempts to square this circle in a variety of different contexts. Not only does the search for principle remain illusive, this area of law is now probably overladen with authorities, not all of which are readily reconcilable with the legal principles noted above or each other.

Contrast for example the explanation of Lewison LJ in the case of Threlfall v ECD Insight Limited [2013] EWCA Civ 1444 about the juristic basis for the jurisdiction where he noted:

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.

Then compare the limited scope given to piercing the corporate veil in the case of Prest v Petrodel Resources Limited [2013] UKSC 34 by Lord Sumption:

In my view, the principle that the court may be justified in piercing the corporate veil if a company’s separate legal personality is being abused for the purpose of some relevant wrongdoing is well established in the authorities. It is true that most of the statements of principle in the authorities are obiter, because the corporate veil was not pierced. It is also true that most cases in which the corporate veil was pierced could have been decided on other grounds. But the consensus that there are circumstances in which the court may pierce the corporate veil is impressive. I would not for my part be willing to explain that consensus out of existence. This is because I think that the recognition of a limited power to pierce the corporate veil in carefully defined circumstances is necessary if the law is not to be disarmed in the face of abuse. I also think that provided the limits are recognised and respected, it is consistent with the general approach of English law to the problems raised by the use of legal concepts to defeat mandatory rules of law.

He went on to explain the limited scope for the piercing of the corporate veil in these terms:

The difficulty is to identify what is a relevant wrongdoing. References to a “facade” or “sham” beg too many questions to provide a satisfactory answer. It seems to me that two distinct principles lie behind these protean terms, and that much confusion has been caused by failing to distinguish between them. They can conveniently be called the concealment principle and the evasion principle. The concealment principle is legally banal and does not involve piercing the corporate veil at all. It is that the interposition of a company or perhaps several companies so as to conceal the identity of the real actors will not deter the courts from identifying them, assuming that their identity is legally relevant. In these cases the court is not disregarding the “facade”, but only looking behind it to discover the facts which the corporate structure is concealing. The evasion principle is different. It is that the court may disregard the corporate veil if there is a legal right against the person in control of it which exists independently of the company’s involvement, and a company is interposed so that the separate legal personality of the company will defeat the right or frustrate its enforcement. Many cases will fall into both categories, but in some circumstances the difference between them may be critical.

Lord Sumption summarised the position at paragraph 35 as follows:

I conclude that there is a limited principle of English law which applies when a person is under an existing legal obligation or liability or subject to an existing legal restriction which he deliberately evades or whose enforcement he deliberately frustrates by interposing a company under his control. The court may then pierce the corporate veil for the purpose, and only for the purpose, of depriving the company or its controller of the advantage that they would otherwise have obtained by the company’s separate legal personality. The principle is properly described as a limited one, because in almost every case where the test is satisfied, the facts will in practice disclose a legal relationship between the company and its controller which will make it unnecessary to pierce the corporate veil … But the recognition of a small residual category of cases where the abuse of the corporate veil to evade or frustrate the law can be addressed only by disregarding the legal personality of the company is, I believe, consistent with authority and with long-standing principles of legal policy.

In the most authorativie decision of the Supreme Court on the non party costs jurisdiction, that of Travellers v XYZ supra (of which more, much more below) Lord Sumption mused:

The common law has an instinctive reluctance to make orders in private law litigation which affect non-parties, but also a long-standing aversion to the unjustified interference by non-parties in other people’s litigation. The first of these instincts is founded on elementary principles of justice. Non-parties may well have a more or less direct commercial interest in the outcome but do not thereby assume the risks associated with contested litigation. Nor are they bound by rules of practice in the way that parties are. At the same time, there are cases where a person who is not on the record may nevertheless be the real party. He may, for example, be an equitable assignee or, arguably, a subrogated insurer, or have some other interest entitling him to litigate in the name of another. The second instinct depends for its practical application on what constitutes interference and what is unjustified, large questions which vary with changing attitudes to litigation. Historically, it arose from the concern of the law with the implications of contested litigation for public order, but is now founded mainly on a purely procedural concern for the fair and efficient conduct of court proceedings. In the context of costs orders against non-parties, the first instinct is reflected in Lords Briggs’s “real defendant” test, and the second in what he has called the “intermeddling” test. I agree with this taxonomy, and more broadly with Lord Briggs’s analysis of the principles and their application to this case.

Accordingly it is key to try an identify what are the concepts which underpin the exercise of the discretion to make or withhold such an order and thus to try to formulate a test which is as simple as it can be for first instant judges to apply in the particular factual context before them.

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