The Court of Appeal has upheld an order that a third party to proceedings, who was the sole director and shareholder of the defendant company, should be joined to the proceedings and ordered to pay some £36 million on account of the claimant's costs: Deutsche Bank AG v Sebastian Holdings Inc and anor [2016] EWCA Civ 23.

The decision emphasises that, in considering whether to grant an application for third party costs, the court has a broad discretion and "the only immutable principle is that the discretion must be exercised justly". Although the exercise of the discretion is "exceptional", that is only in the sense that it is outside the ordinary run of cases. Each case will turn on its facts, but the critical factor is likely to be whether there is a sufficiently close connection between the third party and the proceedings to justify the court treating him as if he were the "real party" to the action. 

Where the non-party has not been warned of the possibility of such an application, that will not preclude the court making an order: it is simply one factor the court may take into account in deciding whether it would be unjust to make the order. Nonetheless, where a party may wish to pursue a non-party for costs in the event a costs order is not met by the losing opponent, it would be prudent to warn the relevant non-party of that possibility as early as possible in the proceedings.

Background

Section 51 of the Senior Courts Costs Act 1981 gives the court a discretion to determine who shall be liable for the payment of costs and to what extent. That includes making orders for costs against non-parties to the proceedings. 

In the present case, the defendant company had maintained accounts with the claimant bank for trading in foreign currencies, shares and financial products. The bank brought proceedings for some US$250 million owed by the defendant on the closing out of various trading positions, and the defendant counterclaimed for approximately US$8 billion for alleged breaches of contract. The High Court gave judgment for the bank in the sum of US$243,023,089 and dismissed the defendant's counterclaim. The defendant was ordered to pay 85% of the bank's costs, which were said to amount to about £60 million, on the indemnity basis.

The defendant failed to make any payment in respect of the judgment or costs. The bank applied to join the defendant's sole shareholder and sole director, Mr Alexander Vik, as a defendant and to obtain an order that he pay the costs of the proceedings personally. The High Court granted the application. Mr Vik appealed to the Court of Appeal contending, in summary, that:

  1. The proceedings against Mr Vik were in substance separate from the main action, and therefore Mr Vik was not bound by any of the judge's findings of fact.
  2. The bank had not warned Mr Vik of the possibility of an application for a third party costs order against him. Following guidance of the Court of Appeal in Symphony Group Plc v Hodgson [1994] Q.B. 179, that failure rendered it unjust and contrary to principle to make a third party costs order. 
  3. The judge erred in the exercise of his discretion, both in making Mr Vik liable for the bank's costs and in failing to exclude particular costs from the order.

Decision

The Court of Appeal dismissed the appeal, with Moore-Bick LJ giving the judgment of the court. 

Summary procedure

In deciding whether a third party should be ordered to pay costs, the procedure to be adopted was a summary one, in the sense that the judge would make an order based on the evidence given and the facts found at trial. Each case would turn on its facts, but the critical factor in each case was the nature and degree of the third party's connection with the proceedings. That would determine whether it was just and fair that the third party should bound by the evidence given at trial and the judge's findings of fact. In other words, the person against whom the order is sought must have a sufficiently close connection with the proceedings to justify the court treating him as if he were a party.

The court referred to the observation of Lord Brown, in Dymocks Franchise Systems (NSW) Pty Ltd v Todd [2004] UKPC 39, that whether it is appropriate to make a third party costs order depends on the particular facts of the case, but where the third party has effectively controlled and supported litigation, whether financially or by giving evidence, with a view to obtaining a personal benefit from it, it would usually be appropriate to regard him as the "real party" to the action, which would normally provide strong grounds for making a third party costs order. 

In this case, Mr Vik was so closely involved in the litigation that there was no injustice in adopting a summary procedure and holding him bound by the judge's findings of fact. The defendant company was entirely under the control of Mr Vik, who was its sole director and shareholder. Mr Vik treated it as his personal trading vehicle and funds were transferred in and out of its accounts as and when suited him. Some US$890 million in liquid funds and shares worth US$92 million had been transferred out of the defendant company in accordance with Mr Vik's instructions, and as a result it was unable to meet the judgment against it. Mr Vik controlled the defendant's conduct of the litigation and was its principal witness, and he had given false evidence and fabricated documents. Mr Vik had had the opportunity to contest all the issues of fact on which the judge eventually made his findings.

Failure to warn

The court noted that the Symphony guidelines were formulated in the context of an application for costs against a third party whose connection with the proceedings was "fairly tenuous", and the reference to a warning was concerned with ensuring that such a person had a fair opportunity to deal with any allegations that might affect his liability for costs before the judge made his findings. It was not directed to a case where, as here, the third party can properly be regarded as the real party to the litigation. Mr Vik had every opportunity to contest the bank's factual and legal case and took full advantage of it, so the only advantage a warning could have given him was an opportunity to reconsider his own position in relation to the proceedings.

The significance of a failure to warn would, the court said, vary from case to case. In the present case the judge was satisfied that a warning at an earlier stage would have made no difference to the conduct of the proceedings. The judge was entitled to reach that conclusion. Mr Vik could not argue that he would have caused the defendant to take a different approach to the litigation, had he known of the potential cost risk to him personally, without conceding that the defendant was little more than a puppet. Nor could he say that he would have given different evidence if he had known of the potential liability. The Court of Appeal agreed with the judge that, in the circumstances of this case, the failure to warn was of very little weight.

Funding the litigation

The court rejected Mr Vik's submission that the judge had been wrong to find that he had funded the litigation. The judge had reached that conclusion as a result of his finding that Mr Vik treated the defendant's assets as his own, and so by leaving funds at the defendant's disposal to pay its lawyers he was in substance choosing to fund the litigation. The Court of Appeal considered that the judge's conclusion could not be criticised, but in any event it was not a pre-requisite to making an order that the third party had funded the litigation. That was a factor which might weigh in favour of making an order, but no more than that.

Quantum

The court also rejected the submission that, if a third party costs order was made against Mr Vik, it should have excluded some £23 million of the bank's costs incurred in respect of the fees of forensic accountants who were instructed to reconstruct records which, the defendant argued, the bank should have maintained in the ordinary course of business. The basis of the third party costs order was that Mr Vik was the real party to the litigation. There was no reason in principle, therefore, why he should not be required to pay the whole of the costs for which the defendant was liable. Any arguments open to the defendant on detailed assessment would be similarly available to Mr Vik to reduce the amount of the liability.

Broad discretion

The Court of Appeal noted that the exercise of the discretion to make a third party costs order was in danger of being over-complicated by authority. Each case turns on its facts, and limited assistance is likely to be gained by citing other first instance decisions in which orders have or have not been made. The court emphasised that "the only immutable principle is that the discretion must be exercised justly". 

Although the case law established that an order for third party costs will always be "exceptional", that was merely in the sense that it was outside the ordinary run of cases where parties pursue or defend claims for their own benefit and at their own expense.