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Third Parties to Proceedings and Enforcement of Costs

The general principle in English law is that costs follow the event with the successful party generally entitled to seek an order that the unsuccessful party pays its costs. Security for costs is very important in this regard as a successful party will still have to pay a balance to its solicitors even with a costs order in its favour and even if the losing party is unable to comply with the order. Fortunately, the Court has discretion to enforce costs orders against non-parties to proceedings in certain circumstances.
The Court’s power to make such orders is statute based and can be found in Section 51 of the Senior Courts Act 1981. It applies to the civil division of the Court of Appeal, the High Court and any County Court. The Court’s discretion is very wide as Section 51 further provides that it shall have full power to determine by whom and to what extent the costs are to be paid.

General Principles

Some general principles were laid out by Lord Justice Balcombe to govern the exercise of the Court’s discretion in relation to non-party costs orders in the case of Symphony Group plc v Hodgson [1994] 1 QB 179. Non-party costs orders were said to be exceptional and it was suggested that the courts should adopt a cautious approach. They were said to be even more exceptional where the applicant could have joined the non-party to the action. A further point raised was the importance of warning the relevant party than the applicant may seek to apply for costs against them. These are only some of the guidelines set out, which are still useful today as a starting point.

The main categories of non-parties to proceedings for the purposes of costs enforcement are liquidators, third party funders, directors and shareholders, insurers and solicitors.

Liquidators

In the cases of Super Speed Ltd (in liquidation) v Bank of Baroda (HCCW 273/2012) and Marshel Exports Limited (in liquidation) v Bank of Baroda (HCCW 274/2012) the joint and several liquidators of the claimant companies brought claim after winding up proceedings had been brought, to challenge the legality of a number of loans made by the Defendant Bank to the Claimants. A funding agreement had been in place with another company, which was also a petitioner in the liquidation. The petitioner agreed to reimburse the liquidators for all costs and other expenses irrespective of the outcome but the claims were eventually dismissed with costs being awarded to the Bank. As a result, the Bank applied to join the liquidators and the petitioner to the claim to seek costs orders against them.
Mr Justice Anthony Chan summarised the law and concluded that although such orders should be exceptional, the court may order a non-party to pay costs if it considers it just to do so taking into account all the relevant circumstances. He emphasized that such orders should not generally be made against ‘pure funders’, who have no interest in the claim. However, if the non-party in question controls or stands to benefit form the claim then it will be considered to be the ‘real party’ and may be ordered to pay costs. This would include for example, a non-party which funds a claim by an insolvent company for its own benefit.
The judge provided guidance specific to liquidators of insolvent companies drawn from the case of Metalloy Supplies Ltd v MA (UK) Ltd (1997) 1 WLR 1613. It was suggested that liquidators would only be liable for the costs of an insolvent company they act for in exceptional circumstances and if impropriety is established. The judge also recognised the public interest considerations in allowing the liquidators to perform their duties and highlighted the importance of security for costs in this regard. In both claims against the Bank of Baroda, the judge found that the liquidators had not acted improperly and that the Bank should have applied for security. However, the judge did order that the petitioner pay the Bank’s costs as a non-party funder with an interest in the outcome of the proceedings.

Third Party Funders

In Excalibur Ventures LLC v Texas Keystone Inc and others (Rev 2) [2014] EWHC 3436 (Comm) costs were assessed on an indemnity basis and it was held that funders will be liable for costs on the same basis as the funded party even if the funder is not personally responsible about the conduct leading to the indemnity basis. Lord Justice Clarke clarified that the so-called Arkin cap, established in an earlier case, applies so that funders are only liable up to the amount of funding provided and only in respect of those costs incurred form the date the funding was provided.
An appeal hearing took place earlier this year to decide two major points, with the decision expected before the end of the year. The first point concerns the indemnity basis, the argument being that funders should not have paid indemnity costs since they had not had conduct of the litigation or acted discreditably and had received confident advice from the funded party’s legal advisers. The second point on appeal concerns the application of the Arkin cap and the issue of whether sums already provided as security for costs are to be included.

Directors and Shareholders

Prior to the appeal in Deutsche Bank A.G. v Sebastian Holdings Inc & Anor [2016] EWCA Civ 23, the High Court had initially awarded the Claimant Bank 85% of its costs on the indemnity basis and made a costs order in it’s favour. The Defendant was a company incorporated in the Turks and Caicos Islands with no assets and therefore failed to pay for the costs resulting in the Bank applying to join the sole director and shareholder to the proceedings for the purpose of enforcing the order against him. Mr Vik conducted and funded the litigation, for his own benefit, and was the main witness yet he appealed on the basis that as a non-party he is not bound by any findings of fact from the proceedings and the Bank failed to warn him contrary to the Symphony guidelines.
Lord Justice Moore-Bick clarified the Symphony guidelines are a non-exhaustive list of factors that courts should consider and not a set of rules. The key principle is that the non-party must have a ‘close connection’ with the claim, which would justify a costs order based on conclusions arising from the litigation and given Mr Vik’s proximity to the Defendant and his role in the proceedings it was not unjust to join him to the claim. The judge also held that there was no need to warn Mr Vik as he was the ‘real party’ and the sole purpose of the Bank seeking to join him as a party was the issue of costs.
Insurers

The Court of Appeal identified the following 5 factors that need to be present before ordering the Defendant’s insurers to pay for the Claimant’s costs in T.G.A. Chapman Ltd. v. Christopher [1998] 1 W.L.R. 12, clarified in subsequent cases:

  1. The insurers must have funded the defence;
  2. The Defence has failed in its entirety;
  3. The insurers and not the Defendants must have been determined to defend the claim;
  4. The insurers had control and conduct of the litigation; and
  5. The insurers fought the claim exclusively or mainly for their own interests.

In Legg v Sterte Garage Ltd [2016] EWCA Civ 97 the Claimant alleged negligence and nuisance caused by the leakage of diesel oil from the Defendant’s garage. The Claimant alleged that this was caused by a one-time spillage from a storage tank in 1997 but there had also been longer-term spillage from an underground tank and pipes. The Defendant’s policy only covered pollution ‘caused by a sudden identifiable unintended and unexpected incident which occurs in its entirety at a specific time and place during the period of insurance’, which only covered the one-time spillage. When it became clear that this was not the cause of the contamination the insurers withdrew their support of the defence by which point the Defendant was insolvent and judgment was entered against it. The Court of Appeal concluded that the insurers’ purpose in defending the claim was not to protect the Defendant against a high damages award but solely to defend a claim that fell within the narrow definition in the insurance policy. It was therefore just for the insurers to pay the Defendant’s costs because had they not defended the claim until 2010 the Defendant would not continue with the claim given its financial position and would have avoided most of the costs incurred. Some obiter comments also suggested that insurers are liable for defendants’ costs liability to Claimants under the Third Parties (Rights Against Insurers) Act 1930.

Solicitors

In Myatt & Ors v National Coal Board [2007] EWCA Civ 307 the Court of Appeal dismissed the Claimants’ appeals against the conclusion that the conditional fee arrangements were unenforceable. The issue in question was whether the Claimants’ solicitors should be liable for the Defendant’s costs with Lord Justice Dyson suggesting that the presence of a solicitor on the record, who is acting for its client is not necessarily fatal to a non-party costs order application. In this case an order was made as the main reason for the appeal was to defend the solicitor’s entitlement to their profit costs, however the decision was said to have been limited to cases where the claim was funded by a conditional fee arrangement and the issue in question was its enforceability.

In contrary to the above, the decision in Systemcare (UK) Ltd v Services Design Technology Ltd & Anor [2011] EWCA Civ 546 provided that funding the proceedings is not a requirement to making an order as it would be sufficient to show that the party in question controlled the proceedings and attempted to derive a benefit from the claim.

The Court of Appeal in Flatman v Germany [2013] EWCA Civ 278 clarified that if a solicitor funds the disbursements as a case progresses does not mean that a costs order against them is likely and solicitors are entitled to act on a normal fee or conditional fee arrangement for a client whom they know or believe will not be able to pay for costs if unsuccessful. It has also been established in Heron v TNT and Mackrell Turner Garrett [2013] EWCA Civ 469, that alleged negligence on the solicitors’ part to obtain after the event insurance is not sufficient to justify a non-party costs order unless it is demonstrably provable that the costs would not have otherwise been incurred.

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