Could you be liable for costs of a litigation you were never a party to?

The English Court has very wide ranging powers when it comes to the question of costs of proceedings. Although, in English litigation, the usual rule is that the losing party pays a proportion of the winning party’s legal costs, in certain circumstances, the Courts may order a person who was not a party to the proceedings to pay the costs of the unsuccessful party.

Since this power to make a costs order against a non-party was first recognised by the House of Lords in 1986, the Courts have repeatedly emphasised the exceptional nature of this remedy and shown great caution when granting such orders. However, in recent years the Courts have shown greater willingness to exercise their discretion when considering whether in all the circumstances of any particular case it is just to make the order.

Although, the Court’s decision on whether to make such an order in each case will ultimately depend on the particular circumstances of the case, the general principles and guidelines applicable in such cases have been laid down in the case law and can  briefly be summarised as follows:

•    Although, costs orders against non-parties are exceptional and should only be ordered where it just to do so in all the circumstances of the case, in general, where the non-party funds and substantially controls a piece of litigation by an insolvent or impecunious party solely or substantially for his own benefit (whether financial or otherwise), he is likely to be held liable for the costs if the proceedings fail;

•    The Court’s 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”. This principle is governed mainly by policy reasons aimed at assisting access to justice and will apply for example in cases of crowd funding where funders have no collateral interest in the outcome of the claim and their contribution is animated by a wish to ensure that genuine dispute is not lost by default;

•    If the non-party however not simply funds the litigation, but substantially also controls or stands to benefit in some way (whether on behalf of the Claimant, Defendant or Appellant), justice will ordinarily require that that party pays the costs, if it is unsuccessful.

•    It would be an extraordinary order for the payment of costs to be made against a non-party where, the applicant had a cause of action against the non-party and could have joined him as a party to the original proceedings, but has not done so. Even if the applicant is unable to provide a good reason for not joining the non-party in such circumstances, he should inform the non-party of his intention potentially to apply for a costs order against him at the earliest possible opportunity. This is an important point, which  recently was held to be particularly relevant by the Commercial Court when refusing to make a  costs order against a non-party.

•    There is no need for the applicant to establish impropriety in the conduct of the litigation on the part of the non-party for an order to be made. Although, impropriety in pursuit of speculative litigation may assist the Court in exercising its discretion and granting the order, it is not a pre-requisite. Nonetheless, the conduct of all the parties is generally a factor to be taken into account by the Court on the question of costs.

The above is by no means meant to be a comprehensive checklist of factors, which the Court may take into account before deciding whether to exercise its discretion. Indeed, the Courts themselves have previously emphasised that the reported cases are not to be treated as such and that the Court’s decision will always depend on consideration of the actual circumstances of each case.

Nevertheless, non-party costs orders should always be carefully considered in relation to, among others, the following types of third parties in English litigation:

•    Professional funders who provide funding or other support in the litigation, which ultimately fails, for some kind of monetary gain will usually be liable for the winning parties’ costs, but only to the extent of the funding provided i.e. if funder provided £1 million pounds, it would usually be required to contribute the same amount to the other side’s costs. However, if the funding arrangement is found to be champertous because for example the funders exercised control over litigation or was to recover disproportionate amounts, the funder may be ordered to pay all of the costs.

•    Company directors and shareholders may be ordered to pay the costs of the unsuccessful company litigant in circumstances where they were not only in control of the proceedings, but also helped to fund and promote the proceedings by an insolvent company solely or substantially for their own financial benefit. In such cases, the applicant will need to show that the director and/or shareholder is the “real party in very important and critical respects” conducting the litigation by an impecunious company and standing to substantially benefit from it.

•    Solicitors and other professional advisers and representatives may also find themselves subject to a non-party costs order in circumstances where the professional adviser or a solicitor’s conduct indicates that he is effectively the  “real party” running the litigation with a  view to potentially attaining a financial or other benefit over and above for example the usual benefit a solicitor would expect to receive under a “no win no fee” arrangement with an impoverished client unable to pay the costs, if unsuccessful.

•    Insurers, whose defence of the proceedings fails, they having previously decided to defend and subsequently take control and fund proceedings exclusively to protect their own interests,  will usually be ordered to pay the costs.

In summary, careful consideration needs to be given to any situation in which there is a suggestion that a third party is involved in a litigation by either funding or/and otherwise controlling its course with a view to potentially benefiting from its outcome, as one may ultimately be faced with a non-party costs order in such circumstances.

David Manasyan

David Manasyan

Solicitor at Zaiwalla & Co LLP

Email: [email protected]
Tel: +44 (0)20 7312 1000