This article was originally published on Thomson Reuters Practical Law.

Whilst it is always satisfying to win at trial, there is little which darkens the mood more than learning that your vanquished opponent is, in fact, impecunious and unable to pay your costs. The good news is that, depending on the circumstances, you could seek an order that a non-party pays the costs of the action ordered against the main opponent. Often, this will be a director of a company which, it transpires, has no assets with which to meet a costs order.

The court’s powers

The court’s power to make a non-party costs order (NPCO) is at section 51 of the Senior Courts Act 1981, and is governed by CPR 46.2. The court’s discretion is a wide one, and the only immutable principle is that it must be exercised justly (Deutsche Bank AG v Sebastian Holdings).

There is no scope to order costs against a non-party which were not ordered against the main defendant (Zanussi v Anglo Venezuelan).

The test for the court

Because of the wide wording of the court’s powers, there is a raft of case law expanding on this topic. The following points are essential considerations in any application for a NPCO:

  • The court must consider whether the non-party is considered to be the real party interested in the outcome of the litigation, or whether they have been responsible for bringing the proceedings and that those proceedings are brought in bad faith or for some ulterior motive, or there is some other conduct which makes it just and reasonable to make the order (Metalloy Supplies v MA (UK) Ltd).
  • Whilst the making of such an order is “exceptional” (Symphony Group plc v Hodgson), that only means that the circumstances put the case outside the ordinary run of cases which are properly brought or defended (Dymocks Franchise Systems (NSW) Pty Ltd v Todd (Costs)).
  • A NPCO does not require a finding of impropriety on the part of the non-party (BE Studios v Smith & Williamson), and the crucial question is whether the non-party held a bona fide belief that the defendant had an arguable case and that it was in the interests of the defendant to advance the case.
  • It is not enough simply that the non-party is the sole director and controlling mind of a company defendant (Gardiner v FX Music). However, in certain circumstances where the interests of a company and its director were so close, it could be just to make a NPCO against the director personally (Alan Phillips Associates Ltd v Dowling).
  • An important indicator in favour of the application would be if the non-party provided a fresh cash injection to continue fighting the case, for example if the company was impecunious throughout the litigation and could only have been funded by the director (a good example is Weatherford Global v Hydropath Holdings).
  • Some degree of causation between the non-party’s intervention and the claimant incurring costs is important, although a causal link with the non-recovery of costs as opposed to the incurring of the costs might suffice, that is, the non-party caused the company defendant to dissipate its assets such that there was nothing to enforce against at the end of proceedings (Turvill v Bird).

External litigation funders

Non-parties who purely fund the litigation but have no interest in its outcome will not face a NPCO (Dymcock; Hamilton v Al-Fayed (Costs)), but it will be an important factor if the funder has a vested interest in the outcome. If a commercial third-party funder is providing access to justice and has capped its support to a figure, and the support is based on the continued good prospects of success at trial, then its liability under a NPCO will be capped at the level of funding it has provided to the defendant (Arkin v Borchard Lines).

However, a note of caution: the strong judgment in Excalibur Ventures LLC v Texas Keystone (Rev 2) demonstrated that third-party funders can be liable for indemnity costs(limited to the extent of their funding, as in Arkin), and that this can be justified when the funder did not take an active enough role in determining whether the litigation continued, for example by taking too much of a laissez-faire approach, and applying insufficient oversight and scrutiny of prospects and progress. The Court of Appeal found that, absent special circumstances, the funder should follow the fortunes of those from whom it hoped to derive a profit.

Insurers

Insurers have been found to be liable for NPCOs where they have conducted the litigation for their sole benefit without reference to the needs or wishes of their insured, for example refusing settlement offers without reverting to their insured (Pendennis Shipyard v Margrathea; Palmer v The Estate of Kevin Palmer & others; Ewart Charles Legg v Sterte Garage Ltd & Aviva UK).

Practical steps

The following are crucial aspects of an application for a NPCO:

  • Put the non-party on notice of a potential NPCO application as soon as practicable, although a failure to do so is not necessarily fatal to the application (Deutsche Bank). NPCOs are particularly useful when litigating against companies with an uncertain asset base or credit history, or whose directors have a lengthy track record of involvement in insolvent companies.
  • Apply for the non-party to be added to proceedings solely for the purposes of costs by way of a formal application, supported by evidence, after the conclusion of the case (CPR 46.2(1)). The first stage is to obtain the court’s permission to add the non-party; the second stage is that the non-party will be given a reasonable opportunity to attend a final hearing of the matter and show cause why the order should not be made.
  • Usually the trial judge will hear the application, although the final hearing of the application should not resemble a mini-trial, and must be kept proportionate.

The court’s wide-ranging powers can be invaluable when faced with an opponent who sets out to frustrate the recovery of costs, and I have often found a successful NPCO application to have been the difference between an unhappy and a satisfied client