Cost control

Winning your case at trial may often be only half the battle. You still need to recover your client's damages and any costs awarded in their favour. This can be difficult if the unsuccessful party is insolvent, or rendered so by the litigation. This has caused some successful parties to attempt to recover costs from others who were not named as a party to the proceedings. Such claims can be successful and are a useful tool for recovering costs.

We have known since 1986, when Aiden Shipping v Interbulk [1986] 1 AC 965 was decided, that s 51 of the Supreme Court Act 1981 allows the court to make costs orders against 'non-parties'. However, the last few years have seen significant developments in this area of law, increasing the range of cases where the court will invoke the power. A recent decision of the High Court provides further assistance to applicants for this type of order.

Recent developments

The latest line of cases might be said to begin with Symphony Group v Hodgson [1994] QB 179. The court described orders for costs against non-parties as 'exceptional', but made the point that those who 'manage' actions may be ordered to pay costs.

A landmark decision came in Dymocks Franchise Systems (NSW) v Todd [2004] UKPC 39; [2004] 1 WLR 2807. The Privy Council explained that although third party costs orders are 'exceptional', that simply means that they are outside the ordinary run of cases and the ultimate question is whether it is just to make an order. The Board went on to say that if, in addition to funding proceedings, the third party also substantially controls or benefits from them, it would normally be right to make an order. In those circumstances, the third party is the 'real party'. This is a term that seems to encapsulate the courts' approach to s 51 applications and arises in several of the decisions. The Board also said that, although not a necessary ingredient to a successful application, evidence of speculative litigation and/or impropriety of the non-party will support an application.

Then followed Gemma v Gimson [2005] EWHC 69; the successful defendants sought and obtained third party orders against the claimant's director and secretary, as the claimant was insolvent and unable to satisfy the costs order. The judge held that an officer of an insolvent company would be liable for costs where they had stood to benefit from the litigation, controlled and directed it or pursued it unreasonably or with ulterior motives. The claimant could not have maintained its role in the litigation without the funding provided by the directors. The litigation had been unreasonably pursued, was not in the company's best interests and was the product of a vendetta against the defendants.

That decision was extended in Goodwood Recoveries v Breen [2005] EWCA Civ 414, a Court of Appeal decision. The court said the law on s 51 orders had developed: if a director is the 'real party' litigating for his own benefit, controlling and/or funding the litigation, a costs order can be made against him or her even if he or she acted in good faith or without impropriety. The pursuit of speculative litigation is put into the same category as impropriety. This was a notable case for the strong criticisms made of the respondent to the application. It was said 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'.

A third party shareholder found himself liable to pay costs in CIBC Mellon Trust Co v Stolzenberg [2005] EWCA Civ 628. Here, the court held that funding, controlling and directing litigation in a shareholder's own interests (including his interest as a shareholder) can give rise to liability.

The courts have been alive to the fact that such applications of s 51 erode the principle of a company's separate legal personality. It has been said that the critical distinction is whether the proceedings were brought bona fide and for the benefit of the company, such that the company is the 'real party'. If they were, then to make an order would be an unacceptable inroad into the principle of limited liability: Metalloy Supplies v MA (UK) Ltd [1997] 1 WLR 1613. Contrast this with Goodwood Recoveries, above, which indicates that lack of bona fides is not necessary. Despite what, at first glance, may appear to be incompatible dicta, the decisions are reconcilable by virtue of the concept of the 'real party': unlike Metalloy, Goodwood deals with the situation where the director (not the company) is the 'real party' litigating for his or her own benefit.

Goodwood Recoveries has since been applied in Petroleo Brasileiro v Petromec [2005] EWHC (Comm) 2430. The judge in this case, Moore-Bick LJ, commented that it had 'not been suggested that the commencement or conduct of either of the two actions'¦ [in the proceedings]'¦ was motivated by any improper considerations or tainted by bad faith'. He went on to find that the respondent had controlled the litigation, made available the funds to maintain it, and had an interest in its outcome: he was the 'real party', and was made jointly and severally liable for the costs. Additionally, the court rejected a submission that the application should have awaited a detailed assessment of the costs.

Latest decisions

The procedure for a third party costs order requires the non-party to be added to the action before the court considers whether to make the order sought: CPR 48.2(1).

In a judgment given on 11 October 2005 (but not published in writing until February 2006), Mr Justice Etherton held that there is no substantive threshold test to be met when the applicant seeks to join a third party to the proceedings: Dranez Anstalt v Hayek (11 October 2005, unreported).

The judge said that, while the court has a discretion whether to add the non-party to the proceedings, he rejected the third party's submission that it was possible challenge joinder on the ground that the application had no real prospect of success. As such, the test is far less rigorous than that applied in a summary judgment application under CPR Part 24. The procedure is a summary one, and it would not be 'sensible or efficient' to have a preliminary hearing on the merits. The judge also held that the purpose of joinder was to give the non-party the protection conferred by the rules of court, for example as to the use of statements of case and disclosure of documents, in accordance with the views expressed in Aiden Shipping (above). The process was not intended to give the non-party the opportunity to make preliminary objections.

The judgment makes it clear, however, that the court retains its power to strike out applications that are an abuse of process 'whether on the ground of delay or other misconduct'¦ or because the application is manifestly so fundamentally misconceived as to amount to an abuse of process'. On the facts, he rejected a submission that there had been inexcusable delay in bringing the application. The court held that delay would not be fatal to the application at the joinder stage unless so severe as to amount to an abuse of process.

The law relating to applications under s 51 is clearly still developing, and no doubt we can expect further decisions on the subject in future.

Daniel Kidd is a solicitor in the dispute resolution department at Denton Wilde Sapte