It is widely recognised that adverse costs orders represent one of the main risks to parties involved in litigation. However, a risk which is perhaps less apparent is that such orders may also be awarded against non-parties to the proceedings pursuant to section 51(1) and (3) of the Senior Courts Act 1981.
In the recent case of Goknur Gida v Organic Village Ltd & Another1, the High Court considered whether to make a costs order against a company's managing director. In refusing to grant this order, the court provided helpful guidance on the circumstances in which non-party costs orders may be made. The case is also useful in highlighting the procedural considerations which parties making a non-party costs application should bear in mind.
Goknur Gida's (the "Claimant") claim against Organic Village Ltd (the "First Defendant") was struck out by the court and it was ordered to pay the First Defendant's legal costs.
The Claimant subsequently applied for an order requiring the First Defendant to commence detailed assessment proceedings regarding its costs. An order was duly made which specified that, unless the First Defendant commenced those proceedings by a certain date, its costs would be disallowed and it would be required to pay into court the sums that had been paid by the Claimant throughout the course of the proceedings on account of its costs. The First Defendant failed to commence the detailed assessment proceedings by that deadline.
As the First Defendant did not have the financial means to make the subsequent payment into court, the Claimant applied for a non-party costs order to be made against Mr. Aytacli (the "Second Defendant"), the First Defendant's managing director.
Could the Judge hear the application?
The relevant authorities2 make it clear that, save in rare and exceptional circumstances, a non-party costs order application should be dealt with by the trial judge. However, in this case, in the section of the application notice regarding the appropriate level of judge, the Claimant had stated the following: "[the trial judge], if available, or any other QBD judge". That was a clear error by the Claimant and led to a different judge being assigned to the costs hearing.
Therefore, as a preliminary point, the judge had to consider whether it was appropriate for him to hear the application. On the facts of the case, the judge held that he could indeed determine the application because the following "exceptional circumstances" applied:
- the judge had drawn the parties' attention to the relevant authorities and they were content for him to hear the application, albeit that their views were not determinative;
- any adjournment could lead to a lengthy delay, with the possibility that the application might not be heard for as long as 18 months after the trial, which would cause additional cost and inconvenience for the parties as well as a significant waste of court time; and
- the application did not, other than in minor respects, refer to events at trial. Any disadvantage from the judge not having been the trial judge caused no prejudice, and was outweighed by the other considerations set out above.
Why was the non-party costs order rejected?
The judge referred to the leading authorities on non-party costs orders and, in particular, the case of Dymocks3 which established that, where a non-party does not merely fund the proceedings but also "substantially controls" or "stands to benefit from" them, justice will usually require the unsuccessful non-party to pay the successful party's costs.
Taking into account those considerations, the judge rejected the non-party costs order for the following key reasons:
- although the judge accepted that the Second Defendant "controlled" the First Defendant and its litigation with the Claimant (i.e. as it was the sole director of the First Defendant and had made a number of witness statements on its behalf), "something more" was required in the case of a director of a company;
- following on from the point set out above, the judge referred to the case of Housemaker4, which identified that directors of limited companies are in a "special position" and the mere fact that a director who controls the company's litigation also funds the claim is not enough, in the ordinary course, to justify a non-party costs order against it. In doing so, he rejected the Claimant's argument that the observations in Housemaker were somehow inconsistent with those in the Dymocks case;
- the court also needs to take into account the manner in which the funding has been provided by the non-party, including the type and level of funding. In this case, the Second Defendant's funding of the litigation was limited to providing security for the solicitors' fees and this only commenced about halfway through the litigation; and
- the judge disagreed with the Claimant's argument that the Second Defendant would have benefitted if the First Defendant had been successful in the litigation because his personal exposure as guarantor regarding various debts would have been reduced if the Frist Defendant recovered substantial damages and costs. The beneficiary was the First Defendant because its indebtedness would have been reduced or extinguished.
Goknur provides a useful reminder of the factors that the court will consider in making non-party costs orders; namely, the extent to which the non-party has funded and stands to benefit from a successful outcome to, and has exerted control over, the litigation.
Further, the case is also useful in highlighting the procedural considerations which ought to be borne in mind by parties making applications for non-party costs orders, including that:
- parties applying for such costs orders should make clear (either in the application notice or, at least, in the witness statement supporting the application) that it is important that the application should be heard by the trial judge;
- it is on in "rare and exceptional circumstances", such as those which presented themselves in this case and which are summarised above, that the application will be determined by a judge other than the trial judge; and
- even if the parties to the proceedings agree to a different judge hearing the non-party costs application, that is not determinative and the judge which is designated to hear the application remains the ultimate arbiter as to whether that approach is in fact suitable.
Visit us at mayerbrown.com
Mayer Brown is a global legal services provider comprising legal practices that are separate entities (the "Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP and Mayer Brown Europe - Brussels LLP, both limited liability partnerships established in Illinois USA; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales (authorized and regulated by the Solicitors Regulation Authority and registered in England and Wales number OC 303359); Mayer Brown, a SELAS established in France; Mayer Brown JSM, a Hong Kong partnership and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. "Mayer Brown" and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.
© Copyright 2020. The Mayer Brown Practices. All rights reserved.
This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.