The Court of Appeal upholds a non-party costs order against a third party who was the "real party to the litigation"

The Court of Appeal upholds a decision to penalise a non-party to the litigation in costs and underlined that the most important consideration was whether the person against whom the order was sought had a sufficiently close connection to the proceedings to justify the court treating him as though he were a party.

At trial, the Commercial Court found that Mr Alexander Vik, the sole shareholder and sole director of the defendant (Sebastian Holdings Inc.) had controlled and funded the litigation, that he had stood to benefit personally from it and that the company's conduct had been reprehensible. In light of this, the Commercial Court made a non-party costs order against him.

The Court of Appeal stated that, "the critical factor in each case is the nature and degree of [the non-party's] connection with the proceedings, and further, in a case where the court is satisfied that the third party is effectively controlling the litigation, supporting it, whether financially or by giving evidence, and is doing so with a view to obtaining a personal benefit of some kind if it is successful, it will usually be entitled to regard him as the real party to the action."

Here, Sebastian Holdings was entirely under the control of Mr Vik; he treated it as his personal trading vehicle to hold and dispose of funds on his behalf as he thought fit, he ran its affairs without troubling with corporate formalities, (resolutions, minutes or the filing of company accounts) and funds were transferred into and out of its accounts in accordance with his directions. Between 9th and 22nd October 2008 US$890 million in liquid funds and shares worth US$92 million were transferred out of Sebastian Holdings in accordance with Mr Vik’s instructions, and that as a result, the company was unable to meet the judgment against it. Mr Vik controlled Sebastian’s conduct of the litigation and was the principal witness called on its behalf. Moreover, parts of his evidence were false and the counterclaim (which, if successful would substantially benefit Mr Vik and his family) was based on documents which had been partly fabricated by him.

The Court of Appeal concluded the judge's findings about the director's close connection with the main action were not seriously open to challenge. He had given evidence at trial and had had ample opportunity to contest the issues of fact. In response to Mr Vik's objection that he had not been warned of the application for a non party costs order against him, the Court held that the only advantage of warning him would have been to give him an opportunity to reconsider his position and no evidence had been adduced from Mr Vik to support a suggestion that his approach would have been different. The Court of Appeal therefore concluded that the judge had been right to find that the failure to warn him was "of very little weight at all."

NB: In response to the argument that to make an order for costs against Mr Vik would infringe the principle of witness immunity, the Court of Appeal distinguished an earlier Court of Appeal decision (Oriakhel v Vickers (2008)) where insurers were refused a non-party costs order against a third party (who had acted as a witness) partly because an order would have infringed the principle of witness immunity. Unlike Mr Vik, the witness in Oriakhel had not funded and controlled the litigation for his own benefit and thus could not be regarded as the "real party to proceedings."