Principle and non party costs orders

Although the caselaw has developed over time with notable cases along the way being Aiden Shipping CoLtdv Interbulk Ltd [1986] 2 WLR 1051 and Symphony Group Plc v Hogdson [1994] QB179 but the root of modern authority lies elsewhere: a Privy Council case which has been repeatedly cited with approval by the Court of Appeal and now the Supreme Court and has been applied ever since.

It follows that the case of Dymocks Franchise Systems v Todd [2004] 1 W.L.R. 2807 is the starting point for consideration of formulating the general principles which underpin any search for a workable test:

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”.”

On the requirement of causation of the incurrence of costs he had earlier observed:

The Board was referred to very little authority on this issue, merely dicta from Hamilton v Al Fayed (No 2) [2003] QB 1175and Gore (t/a Clayton Utz) v Justice Corpn Pty Ltd (2002) 189 ALR 712 . In the Hamilton case [2003] QB 1175 , Simon Brown LJ noted at p 1198, para 54 that: “there is ample authority” and “no dispute” but that “proof of causation is a necessary precondition to the making of a section 51 order against a non-party” before concluding, as a further ground for rejecting the application made in that case for costs against non-party funders, that some at least of the contributions “plainly did not cause Mr Al Fayed to incur any costs which he would not otherwise have incurred”.

In the Gore case 189 ALR 712, 731, para 53, the Federal Court of Australia was clearly adopting the same approach when stating:

“Justice Corpn had nothing to do with the decision to institute those proceedings and it had nothing to do with any subsequent decision (prior to 21 April 1999) to prosecute those proceedings. There is no basis upon which Clayton Utz could claim its costs against Justice Corpn in respect of that period. As his Honour said, there was no causal connection between those costs being incurred and the involvement in the case of Justice Corpn.”

Although the position may well be different when a number of non-parties act in concert, their Lordships are content to assume for the purposes of this application that a non-party could not ordinarily be made liable for costs if those costs would in any event have been incurred even without such non-party’s involvement in the proceedings. On the facts of this case, however, their Lordships conclude that, but for Associated’s involvement, the Todds would not have pursued their appeal to the Court of Appeal and thus occasioned the costs both in that court and on the further appeal to the Privy Council.

 The case then established the real danger for directors and liquidators softened only by the nebulousness of the real interest approach:

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.”

A further word about causation. The issue was raised and then dealt with in tentative terms in this case. At stake is the issue of whether “but for” causation or “effective” causation is the test, and whether a combination of causes will suffice for an order to be made against the non party to the full extent of the costs sought. This issue may now have been conclusively addressed by the Supreme Court as we shall see in a later post in this series:

The costs order was made against the appellant third party, Mr Michael Slater, in circumstances where the judge described him as playing the parts of director, shareholder, company secretary, solicitor and investigator and only witness for the claimant. The claim which has given rise to the litigation and to the costs in question was purchased by Mr Slater’s company and pursued by him in the name of his company (which he owned together with his wife). The judge had harsh things to say of Mr Slater’s conduct in the course of the proceedings, finding that he had been dishonest in failing to disclose a key document, had lied in his evidence, and had attempted by means of an “intimidating and grossly improper letter” to persuade a witness from coming from overseas to give evidence at trial in favour of the defendant. The judge found that he had personally conducted the litigation as he thought fit both before and after the purported sale of the claimant company to another party. However, the judge did not find that he had funded the litigation, other than, it has to be said, arranging on his company’s behalf a conditional fee arrangement with the firm of solicitors to which he was himself a consultant and in whose name he conducted the litigation himself. The judge suspended his judgment as to whether Mr Slater did or did not have a bona fide belief in the claim.

Against this unpromising background, none of which is disputed, Mr Bacon has submitted on Mr Slater’s behalf that the judge was not entitled to make him liable for the whole of the costs of the unsuccessful action, on the twin grounds that (1) it requires exceptional conduct to render a director liable for his company’s litigation costs; and (2) such improper conduct as may exceptionally justify an order for costs against a director must be the effective cause of the incurring of the costs in question. Mr Bacon submits that in the present case it is critical that the judge did not make a finding of initial bad faith against Mr Slater; and that the conduct during the course of the litigation which was the subject of judicial criticism did not cause any costs other than the costs of an adjournment during the trial, for which the claimant’s solicitors had already accepted financial responsibility.

 19. The court noted the competing arguments on how the causation requirement might be framed:

In Globe Equities Ltd v Globe Legal Services Ltd [1999] BLR 232, 241 Morritt LJ said:

“It was not disputed that the conduct of the non-party must have been a cause of the applicant incurring the costs it seeks to recover. For Globe [the applicant] it was submitted that this requirement was satisfied by the obvious fact that the costs of Globe were incurred because of the defences and counterclaims maintained by the firm ostensibly on behalf of GLS but in substance for its own benefit. Counsel for the firm [the non-party] contended that that was not enough. He submitted that all the *2740 circumstances which made the case exceptional must also be a cause of the costs sought to be recovered. He submitted that the proper question was ‘but for the exceptional circumstances would the costs sought have been incurred’. I do not accept that submission. I accept that the costs claimed must have been caused to some extent by the non-party against whom the order is sought for otherwise it is hard to envisage any circumstance in which it could be just to order the non-party to pay them. But I do not see why they must be caused by all the factors which render the case exceptional. For example, one of the factors likely to be present in most, if not all, cases where an order is made is that the litigation was for the benefit of the non-party; but that is no reason to require that the costs were all incurred in obtaining that benefit.”

Mr Graham relied on this passage.

The counterbalancing proposition was put thus:-

On the other hand Mr Bacon relied on Byrne v Sefton Health Authority [2002] 1 WLR 775 , para 35 where Chadwick LJ said:

“it cannot be right to make an order under section 51(3) of the 1981 Act unless the court is satisfied that the conduct of the person against whom the order is to be made has been causative of the costs which have been incurred by the person seeking the order. There must be a sufficient causal link between the person who is to pay the costs and the incurring of those costs. It is necessary to determine whether the conduct complained of is really an effective cause of the costs incurred.”

In the Goodwood case

Moreover, to revert to the second question posed above, it is also unnecessary to rule on the question whether Morritt LJ in the Globe Equities case [1999] BLR 232or Mr Bacon’s submission, said to be supported by Chadwick LJ in Byrne’s case [2002] 1 WLR 775 , is correct. However, I would express a preference for what Morritt LJ said. This is partly because, while this question was plainly and expressly before Morritt LJ, that was probably not the case in Byrne’s case; partly because I see force in the reasoning and example given by Morritt LJ in the passage quoted at para 61 above; partly because in the Dymocks case [2004] 1 WLR 2807 the Privy Council adopted an analysis which was consistent with Morritt LJ’s view, by asking whether the third party had caused the costs in issue and then leaving the rest for the exercise of a principled discretion in the ultimate interests of justice; and partly because it seems to me that such an analysis is more likely to provide a means to a clearer and juster solution to the myriad forms in which the issue under section 51(3) may arise.

So far so easy. But later authorities have both loosened the principled nature of the test described by the Privy Council and also tightened up on the test of causation, so much so, that in many instances causation will be a complete defence to an application for a non party costs order.

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