In the present economic climate there are an increasing number of companies going into liquidation and with increasing cash-flow problems in the industry it is likely that the number of adjudications, arbitrations and Court claims will increase. In this article, I review the law on Third Party costs orders, a topic that may be particularly relevant if you are bringing a claim as the director of a small company (particularly one which is little more than a vehicle for you trading by yourself) and which you are attempting to keep afloat. In this article I look at the wide jurisdiction given to the Court to make orders against people who are not a party to the original proceedings and the test applied by the Court - in other words, the jurisdiction given to all courts to go behind the corporate veil of such court orders against those who run or fund limited companies.

The Statutory Framework

The discretion of the Court to make an order, ordering that a non-party be made a party to proceedings and held jointly liable for the costs of an action is contained in Section 51 of the Supreme Court Act 1981 as substituted by the Courts and Legal Services Act 1990 which provides:

"4 Costs

  1. the following section shall be substituted for section 51 of the [1981 c. 54.] Supreme Court Act 1981 (costs in civil division of Court of Appeal and High Court)

"51 Costs in civil division of Court of Appeal, High Court and county courts

  1. subject to the provisions of this or any other enactment and to rules of court, the costs of and incidental to all proceedings in
    1. the civil division of the Court of Appeal;

    2. the High Court; and

    3. any county court

Shall be in the discretion of the court.

  1. Without prejudice to any general power to make rules of court, such rules may make provision for regulating matters relating to the costs of those proceedings including, in particular, prescribing scales of costs to be paid to legal or other representatives, hig

  2. The Court shall have full power to determine by whom and to what extent the costs are to be paid."

This is further supplemented by CPR Rule 48.2 which states:

"Where the court is considering whether to exercise its power under section 51 of the Supreme Court Act 1981 (costs are in the discretion of the court) to make a costs order in favour of or against a person who is not a party to proceedings –

  1. that person must be added as a party to the proceedings for the purposes of costs only; and

  2. he must be given a reasonable opportunity to attend a hearing at which the court will consider the matter further."

The intention of Section 51(1) has been reviewed in a number of cases the leading case being Aiden Shipping Co Ltd v Interbulk Ltd The Vimeira - [1986] AC 965. Judgment was given by Lord Goff of Chieverley who determined that an order for costs could be made against a party who has a "connection" with the litigation.

The jurisdiction of the Court to grant costs order has subsequently been refined by the Court of Appeal and in Goodwood Recoveries Ltd v Breen - [2005] EWCA Civ 414. Rix LJ stated at paragraph 59:

"... the law has moved a considerable distance in refining the early approach of Lloyd LJ in Taylor v Pace Developments. Where a non-party director can be described as the "real party", seeking his own benefit, controlling and/or funding the litigation, then even where he has acted in good faith or without any impropriety, justice may well demand that he be liable in costs on a fact-sensitive and objective assessment of the circumstances"

Goodwood was approved and amplified by the Court of Appeal in Petromec Inc v Petroleo Brasileiro SA Petrobras - [2006] EWCA Civ 1038 where at paragraph 10 of the Judgment Longmore LJ stated "...I would therefore wish to record my respectful view that paragraph 59 of the judgment of Rix LJ in Goodwood (by which in any event, bound) correctly states the law in the following terms...". Longmore LJ then in paragraph 11 of the Judgment stated:

"For the avoidance of doubt, it may not be necessary to add that this principle is not confined to "directors".

In the case of Dymock Franchise Systems v Todd - [2004] 1 WLR 2807, Lord Brown of Eton-under-Heywood summarised at paragraph 29 the authorities as follows:

"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 appeal fails."

In the case of Jackson v Thakrar - [2007] EWHC 626, His Honour Judge Coulson stated at paragraph 44 of his judgment:

"In other words, in each case, what was being funded was a positive claim that was in the particular interest of the funded party himself."

It has been argued that causation is the appropriate test, a point which was raised in the case of Total Spares & Supplies Ltd & Anor v Antares SRL & Ors - [2006] EWHC 1537 Mr Justice David Richards states at paragraph 54 of his judgment:

"In the light if these recent statements, it cannot in my judgment any longer be said that causation is a necessary pre-condition to an order for costs against non-party. Causation will often be a vital factor but there may be cases where, in accordance with principle, it is just to make an order for costs against a non-party who cannot be said to have caused the costs in question."

In essence therefore the test to be applied when determining whether to make an order under section 51(1) is:

  1. if the non-party was "the real party" in that the action was pursued for his benefit; and

  2. the non-party controlled and/or funded the litigation then on a fact sensitive basis the court should consider exercising its discretion in ordering costs against a non-party.

It is sometimes argued that such an order can only be made in exceptional circumstances which Mr Justice Morgan in PR Records v Vinyl 2000 Limited & Ors - [2007] EWHC 1721 meant "no more than outside the ordinary run of cases".

This test has been interpreted in other ways including issues of causation and funding but in the case of I-Remit Inc v Far East Express Remittance Ltd - [2008] EWHC 939 (Ch) David Richard J found that the directors and sole shareholders of a company which went into liquidation following a trial were liable for a third party cost order. In particular of note is that the Judge found that the case against the first respondent was all the stronger because the defence and counterclaim in that case was based on the evidence of the respondent.

Further it was also found in this case that the absence of any notice by the applicant of an intention to seek an order was not (in the circumstances of the case) a strong factor for denying the application as the applicant did not know at the time of the trial that the respondent had greatly reduced its business.

In addition this case is authority for the proposition that it is not a requirement for the granting of an order that the respondent funded the litigation. The learned judge followed the guidance in Goodwood and determined that the respondents had controlled the defence and counterclaim and success would have been largely or entirely for their own benefit.

A defence often raised to these applications is the failure to make an application for security for costs. Such an application has been held not to be a bar to an application for a third party cost order. This line of defence was considered by the Court of Appeal in Petromec and in particular by Longmore LJ who at paragraph 14 in which he stated:

"But the fact that in the course of the proceedings a judge (Andrew Smith J in this case) ordered security which, in the event, has turned out to be inadequate should not be any reason for declining to exercise jurisdiction in an otherwise appropriate case. As the judge said in paragraph 43 "it is no more unjust to make the backers of an insolvent company liable for the costs.... Than it is to require them to provide security for costs on its behalf."

Conclusion

Therefore, as stated above, the test to be applied by the Court when deciding whether to exercise its powers under the CPR and under Section 51 of the Supreme Court Act 1981 is a three-part one as follows:

  1. Did the non party control the proceedings? and/or

  2. Did the non party fund the proceedings? and/or

  3. Were the proceedings for the non party's personal benefit?

What Might Constitute Controlling The Proceedings?

Whilst the Court has a discretion to determine what might constitute controlling the proceedings it is clear that if a non party were to be the principal witness and/or be the party giving instructions on behalf of the party to proceedings to solicitors then that person might well be held by the Court to be controlling the proceedings. This may be all the clearer if rather than instructing solicitors the company is represented by the person in their own right.

Did The Non Party Fund The Proceedings?

While the simple payment of legal fees will not be enough to obtain a costs order against a non-party, if that person has controlled proceedings or will benefit from the success of any proceedings then funding will be considered and if that party has funded the claim then it would appear more likely that a costs order would be made against them.

Were The Proceedings For The Non Party's Personal Benefit?

This is an important question and the Court will ask itself and one might foresee a presumption by the Court that if you are a sole director or one of only a couple of directors of a company which is particularly small that you would personally benefit from proceedings being successful and therefore determining that the proceedings were for that non party's personal benefit.

If the Court finds all three to be the case it is highly likely that a third party costs order will be made against the non party. Therefore if you are director of a small construction company and you are pursuing debts owed to your company which, if not paid, will lead to your company going into liquidation then there is a high risk that if you lose the case the non party will be made a party and ordered to pay the costs of the action.

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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.