Non-party costs orders against those who have funded defences are more unusual than orders made against those who have funded claims. The recent judgment in the case of The Creative Foundation v Dreamland Leisure Limitedhas contributed to the developing law in this area and sheds light on when an order might be made.

In summary, Arnold J found that “in all the circumstances … this is an exceptional case and it is just to make an order for costs against R”, a non-party, under section 51(3) of the Senior Courts Act 1981. Proceedings against R’s family company and sons (together, D) were defended because R funded them; the defence was principally for R’s benefit and R was closely involved in the decision-making (ie controlled the litigation). R was clearly “a real party” to the proceedings, and it was not necessary for her to be “the only real party”.

The Creative Foundation followed the 2011 case of Merchantbridge & Co Ltd and another v Safron General Partner 1 Ltd and others regarding funders of defences. Following a successful claim against a fund manager, the High Court made a non-party costs order against five investors in the fund who had met the costs of the defence, had an interest in the outcome of the claim (which need not be financial), and had control over the litigation by making major decisions.

From considering both cases, the following similarities and differences emerge.

Causation

The issue of whether an order can only be made if the non-party has caused the applicant to incur costs is one that has yet to receive a determinative answer by the Court of Appeal. The conclusion can be drawn from several authorities that although the court has jurisdiction to make a non-party order, even if the conduct complained of has not caused the applicant to incur the costs sought, it will be rare for the court to make an order in the absence of causation. Furthermore, causation may be a ground for limiting the amount of the costs awarded in the exercise of discretion.

The Creative Foundation and Merchantbridge lend support to this conclusion. In The Creative Foundation, Arnold J said that it was not necessary to attempt to resolve the different approaches, and that he would apply the test stated by Chadwick LJ in Byrne v Sefton Health Authority, which is as follows:

“… it cannot be right to make an order under section 51(3) of the 1981 Act unless the Court is satisfied that the conduct of the party against whom the order is to be made has been causative of the costs which have been incurred by the person [applying for] the order. There must be a sufficient causal link between the person who is to pay the costs and the incurring of those costs. What is necessary is to determine whether the conduct complained of is really an effective cause of the costs incurred.”

In The Creative Foundation, Arnold J held that:

“It is clear that Dreamland would not have been able to fund the defence of the proceedings. It is evident that neither J nor J [the second and third defendants] would have been able to fund them other than to a modest extent either. Accordingly, I conclude that, if R had refused to fund the defence of proceedings, Dreamland would not have defended the proceedings and the Foundation would have obtained judgment in default against Dreamland.”

In that sense, R caused the claimant to incur further costs.

In Merchantbridge, Mackie QC HHJ made very similar comments about causation. He said that “If the Defendants had not funded the defence of the action the Claimants would have obtained default judgment”, and added that “But for their [the costs defendants’] decision to fund the litigation, the Claimants’ costs in succeeding with their claim would have been very much less. In those circumstances justice requires that the [costs] Defendants should in principle pay the Claimants’ costs of their action against SGP1 [the defendant].”

Period for which the funder is liable

Linked to causation is the period for which the funder of the defence is liable to pay costs.

In The Creative Foundation, Arnold J did not accept that R should pay all of the claimant’s costs of the proceedings. Although the judge found that R was “actively and closely involved in … the events which gave rise to the Foundation’s claim”, any costs incurred by the claimant before it acquired the right to bring a claim (as the assignee of title to the mural and of the cause of action of the landlord and freehold owner of the building) could not be recovered from R.

In addition, Arnold J held that the claimant “would have incurred the costs up to the service of the Claim Form and Particulars of Claim even if Dreamland had not defended the proceedings” and the claimant had been awarded judgment in default. Accordingly, Arnold J ordered R to pay the claimant’s costs only from the date on which the defendants filed acknowledgments of service indicating their intention to defend the claim, as that was the point at which R’s funding caused the claimant to incur further costs.

In Merchantbridge, Mackie QC HHJ also considered this point, although the facts were slightly more complicated due to the costs-defendants ceasing and then later resuming funding. Mackie QC HHJ held as follows:

“… Right from the start the Defendants knew that there would be an issue about funding and they must have considered this. On 11 December 2003 Macfarlanes wrote to Addleshaw Goddard stating that the defence was being funded by a ‘pure funder’. They knew that they were running a risk about which they had taken advice. It follows that the Order should cover the entirety of the litigation apart from the initial period when service was being acknowledged and a Defence considered only for the purpose of preserving the position so that the Defendants could agree the extent to which SGP1 [the defendant] should defend the proceedings and how these should be funded. As I see it therefore the order should start from approximately 1 January 2004.”

Both cases suggest that costs incurred by the claimant up to the point at which the defendant indicates its intention to defend the claim may be irrecoverable from a funder of a defence, on the basis that the funder did not cause those costs to be incurred and/or the claimant may have had to incur those costs anyway in order to obtain judgment in default.

Not significant that the defendant had insufficient funds

In Merchantbridge, the costs-defendants sought to rely on the fact that the claimants “must have known when they brought this action that SGP1 [the defendant] would not be good for the money if it was successful”. However Mackie QC HHJ said that:

“I do not see this as a significant factor. The Claimants were entitled to bring the action. They would have known that SGP1 was not good for the money. They may have considered that if successful, they could place SGP1 into liquidation and successfully pursue others for funds. They might have judged that the new [costs] Defendants would come forward with an offer. They might have hoped that if all the other liabilities of SGP1 were being met by the shareholders the Claimants would also be paid. Whatever those risks the Claimants would not have run up a fraction of the costs they incurred but for the intervention of the [costs] Defendants.”

In The Creative Foundation, the first defendant (against whom the summary judgment application was made) was balance sheet insolvent throughout the proceedings, as noted by Arnold J. However, this issue was not considered further.

No need for defendant to be at fault

In Merchantbridge, Mackie QC HHJ said that “This is not a case where the [costs] defendants attract moral blame, but they took a decision to fund the defence of an action where they had, amongst other things, an interest of their own to protect.”

This point was not considered in The Creative Foundation judgment, although there was no suggestion that R was at fault or to blame for funding the defence.

Conclusion

These cases add to the extensive authority on non-party costs orders, despite the Court’s attempts to discourage extensive citation of authority. As one irritated judge noted:

“There is now an abundance of authority on the absence of any need for abundant authority on the principles which should guide a judge as to whether to make a third party order for costs.”

(Alan Phillips Associates Ltd v Dowling (t/as the Joseph Dowling Partnership).)