Non-party costs orders - A Practical Guide

Summary

Under section 51(1) and (3) of the Senior Courts Act 1981, the Court has jurisdiction to award the costs of litigation to a non-party. Although historically the Court has been cautious in granting such an order, there has more recently been a shift in the case law and such an application should be given consideration if it looks as though an unsuccessful opponent does not have the funds to pay an adverse costs order. In the recent High Court cases of The Creative Foundation v Dreamland Leisure Ltd & Others [2016] EWHC 859 (Ch) (“the Creative Foundation”) and JustMahe Inc v Smirnova (unreported), we successfully obtained a non-party costs order on behalf of our respective clients, the Creative Foundation and Ms Smirnova. We set out below the circumstances in which such an order will be made and a brief summary of these cases.

Principles

As Arnold J stated in the Creative Foundation judgment, there is little dispute over the applicable principles as to when a non-party costs order will be made. He stated that the principle factors which are relevant to the exercise of the Court’s discretion relate to the funding of, benefit and control of the defence of the proceedings.  The general principles for the exercise of the Court’s discretion were first set down in the Court of Appeal case of Symphony Group Plc v Hodgson [1994]. However, the Privy Council case of Dymocks Franchise Systems (NSW) Pty Ltd v Todd and others [2004] UKPC 39 is now considered the starting point and sets out the general principles that can be summarised as follows:

• Costs orders against non-parties are “exceptional”, but that simply 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 case is whether in all the circumstances it is just to make the order;
• Generally speaking, the discretion will not be exercised against “pure funders”, i.e. “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”.
• “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.”
• The non-party may be “the real party” to the litigation, but it is not necessary that he be “the only real party” to the litigation, provided he is “a real party in … very important and critical respects”.
• “[G]enerally 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”
• There is no need for an applicant to establish impropriety, though its presence may per se support the making of an order.

As to causation, although the Court of Appeal has not determined whether the non party has to have caused the costs to be incurred, in the Dymocks case the Court assumed that this had to be the case. In the Creative Foundation, Arnold J relied on approach by Chadwick LJ in Byrne v Sefton Health Authority [2001] EWCA Civ 1904 who stated that there must be a sufficient causal link between the person who is to pay the costs and the incurring of those costs. He went on to say that what is necessary is to determine whether the conduct complained of is really an effective cause of the costs incurred.

Procedure

The procedure is set out in CPR 46.2. There is in effect a two-step process to the application:

1. The non-party must be added as a party to the proceedings for the purposes of costs only;
2. The non-party must be given an opportunity to attend a hearing at which the Court will consider the matter further.

As to notice, the Symphony case concluded that it was prudent to give notice to the respondent to any application as soon as possible.

As to when the application should be made, it is not necessary to make it during the main proceedings and it is not unusual for applications to be made once a party has established that it is unable to enforce its costs order against the original party.

Recent Cases

JustMahe v Smirnova

As set out above, in the case of JustMahe v Smirnova, we acted for the Defendant. The Claimant’s case had been struck out for failure to comply with an order to provide security for costs. Our client was awarded her costs of that application.  The Claimant had then applied for relief from sanctions but this failed and again our client was awarded her costs of that application. The Claimant company was insolvent and failed to pay the costs that had been awarded. Therefore we applied on behalf of our client for a non-party costs order against the director of the Claimant company, Mr Windsor.

As Mr Windsor was the sole director and shareholder, we argued that he had complete control over the litigation and the only beneficiary of the proceedings would be Mr Windsor himself. Further, all witness statements in the proceedings had been in his name and there was no other party or person involved. In addition, he had been conducting the litigation effectively as a litigant in person.

The application was successful and the Court made the order sought. Mr Windsor was ordered to be jointly and severally liable with the Claimant company for the Defendant’s costs.

The Creative Foundation v Dreamland Leisure Limited (1), Jeremy Godden (2) and Jordan Godden (3)

In this case we acted for the Claimant company in a claim for the delivery up of a Banksy mural. Summary judgment was granted to our client in September 2015 with the costs of the proceedings awarded to our client. A payment on account in the sum of £100,000 was ordered to be paid within 14 days but this was not paid, and shortly thereafter the First Defendant ceased to trade. After an application under CPR Part 71 to cross examine the Second Defendant as to the company’s means, it was disclosed by the company’s solicitors that the proceedings had been funded by Mrs Godden, the mother of the Second and Third Defendants, Jeremy and Jordan Godden. This led to the application being made for a non-party costs order against Mrs Godden. It was argued that she had funded the Defendant’s defence of the proceedings, stood to benefit from a successful defence and substantially controlled the defence.

As regards the funding of the proceedings, the Court found that if Mrs Godden had not funded the defence, Dreamland would not have defended the proceedings and the Foundation would have obtained judgment in default against Dreamland. As regards who stood to benefit from the proceedings, Arnold J concluded that the defence of the proceedings was undertaken principally for the benefit of Mrs Godden. She did not fund the proceedings purely out of maternal affection for Jeremy and Jordan Godden. Finally, as regards control, Arnold J concluded that even if the ultimate decisions were taken by Jeremy and Jordan Godden, Mrs Godden was actively and closely involved in the defence of the proceedings and that she was consulted upon such decisions.

In conclusion, Arnold J found that Mrs Godden was a real party to the proceedings and that in all the circumstances this was an exceptional case and that it was just to make an order for costs against Mrs Godden.

Conclusion

Both these cases demonstrate the Court’s approach to applications for non-party costs orders.  Where a successful party is faced with an unsatisfied costs order with an insolvent party on the other side, and there is evidence that the proceedings have been funded and controlled by a third party, such an application should be given serious consideration.