News | July 16, 2021

Third Party Cost Orders

Third party costs orders are becoming increasingly fashionable so are receiving some attention from the courts, most recently from the Court of Appeal in Goknur Gida Maddeleri Enerji Imalet Ithalat Ihracat Ticaret Ve Sanayi AS v Aytacli [2021] EWCA Civ 1037, which was a complex dispute, the facts of which need not detain us. After trial, one party applied for certain costs to be met personally by a director/shareholder of the other party, but the judge below declined to make the order sought. The issue for the Court of Appel was whether he had reached the correct conclusion about the circumstances in which a director and shareholder of an insolvent company should be made personally liable for some or all of that company’s costs liabilities incurred in unsuccessful litigation. The particular question was whether it is enough to show that the director controlled and funded the company’s conduct of the litigation or whether it is also necessary to show either that he or she had benefited (or sought to benefit) personally from that litigation, or acted in bad faith or was responsible for impropriety of some kind.

The jurisdiction to make a third party costs order arises under s 51 Senior Courts Act 1981. There is a great deal of authority on the application of the provision, much of which the court reviewed: the leading case remains the Privy Council case of Dymocks Franchise Systems (NSW) Pty Limited v Todd; others include Taylor v Pace Developments, Metalloy Supplies Limited v MA(UK), Gardiner v FX Music Limited, Re North West Holdings PLC, SystemCare (UK) Limited v Service Design Technology Limited, Threlfall v ECD Insight Limited,  Housemaker Services Limited  v Cole, and an unreportedNew ZealandHigh Court case, Arklow Investments Limited v MacLean,all of which the Court of Appeal analysed and carefully filleted. The case is worth attention for this check list of authorities alone, but is  valuable mainly for its distillation of the principles to which they give rise:

“Without in any way suggesting that these authorities give rise to a sort of mandatory checklist applicable to a company director or shareholder against whom a s 51 order is sought, I consider that the relevant guidance can usefully be summarised in this way:

a) An order against a non-party is exceptional and it will only be made if it is just to do so in all the circumstances of the case (Gardiner, Dymocks, Threlfall).

b) The touchstone is whether, despite not being a party to the litigation, the director can fairly be described as ‘the real party to the litigation’ (Dymocks, Goodwood, Threlfall).

c) In the case of an insolvent company involved in litigation which has resulted in a costs liability that the company cannot pay, a director of that company may be made the subject of such an order. Although such instances will necessarily be rare (Taylor v Pace), s 51 orders may be made to avoid the injustice of an individual director hiding behind a corporate identity, so as to engage in risk-free litigation for his own purposes (North West Holdings). Such an order does not impinge on the principle of limited liability (Dymocks, Goodwood, Threlfall).

d) In order to assess whether the director was the real party to the litigation, the court may look to see if the director controlled or funded the company’s pursuit or defence of the litigation. But what will probably matter most in such a situation is whether it can be said that the individual director was seeking to benefit personally from the litigation. If the proceedings were pursued for the benefit of the company, then usually the company is the real party (Metalloy). But if the company’s stance was dictated by the real or perceived benefit to the individual director (whether financial, reputational or otherwise), then it might be said that the director, not the company, was the ‘real party’, and could justly be made the subject of a s 51 order (North West Holdings, Dymocks, Goodwood).

e) In this way, matters such as the control and/or funding of the litigation, and particularly the alleged personal benefit to the director of so doing, are helpful indicia as to whether or not a s 51 order would be just. But they remain merely elements of the guidance given by the authorities, not a checklist that needs to be completed in every case (SystemCare).

f) If the litigation was pursued or maintained for the benefit of the company, then common sense dictates that a party seeking a non-party costs order against the director will need to show some other reason why it is just to make such an order. That will commonly be some form of impropriety or bad faith on the part of the director in connection with the litigation (Symphony, Gardiner, Goodwood, Threlfall).

g) Such impropriety or bad faith will need to be of a serious nature (Gardiner, Threlfall) and, I would suggest, would ordinarily have to be causatively linked to the applicant unnecessarily incurring costs in the litigation” (per Coulson LJ).

Applying those principles to the facts of the case and the judgment of the court below, Coulson LJ found that the judge below had been correct in finding that the director/shareholder concerned had not stood to benefit personally from the litigation. He similarly upheld the judge’s finding that there had been neither bad faith nor impropriety on his part either. He also concluded that the judge had been right to find that it would be unjust to make a s 51 order. Accordingly, the appeal was dismissed.

The tone of the judgment is sober and analytical, but it would be wrong to overlook the warning implicit in the lapidary, single sentence that is the opening paragraph of Coulson LJ’s judgment:

“For those who believe that most civil litigation does not end up being about the costs that were incurred in pursuing that same litigation in the first place, look away now.”