In two recent cases the Court of Appeal has considered whether and the extent to which non-parties will be liable for funding litigation under section 51 Senior Courts Act 1981 (SCA). The two cases are distinct in that the first, Deutsche Bank AG v Sebastian Holdings Inc [2016]1, concerns director liability, and the second Legg and others v Sterte Garage Ltd and another [2016]2, the liability of casualty insurers of the insolvent defendant, but both judgments indicate the willingness of the courts to apply its discretion and widen the net of those caught by non-party costs orders.

In the first case, Deutsche Bank AG v Sebastian Holdings Inc [2016], the lower court held the shareholder and director (Vik) of the judgment debtor company, against whom the Claimant bank (the Bank), had succeeded in obtaining a judgment for almost US$250 million, with costs amounting to approximately £60 million, liable under section 51 SCA on the basis that Vik had controlled, funded, and was so closely connected to the company that it would not be unjust to bind him to it, and that he would personally have benefitted from the litigation, ordering an ‘on account’ costs payment of just over £36 million. Vik appealed the non-party costs order.

In dismissing the appeal, the Court of Appeal considered the principles applicable to applying discretionary non-party costs orders, as set out in Symphony Group Plc v Hodgson [1994]3 and the cases that followed, including the Privy Council decision in Dymocks Franchise Systems (NSW) Pty Ltd v Todd [2004]4 namely that:

  1. Non-party costs orders should always be exceptional, and ordered only where it is just in the circumstances to do so.
  2. The discretion will not normally be applied to pure funders.
  3. There should be substantial control of and benefit to be gained in the outcome of the proceedings to take the funding from simply facilitating access to justice.

In giving the lead judgment, Moore-Bick LJ, noted that:

  • Symphony provided “guidance” as opposed to “rules” on how to apply discretion to non-parties.
  • The facts of this case differed from those in Symphony, which related to the application of a non-party costs order to an individual who was at arms length to the proceedings, and not as in this case where Vik was involved in every stage, including giving evidence. There was therefore no need to warn that he was at risk of a costs order.
  • The lower court’s decision that failure by the Bank to seek security for costs against Vik was not fatal to a section 51 SCA costs order.
  • The principle of witness immunity as set out in Symphony, was not relevant here, as the lower court based its finding on Vik’s relationship to the company, rather than the legitimacy of it.
  • Issues as to the amount of costs ordered could be addressed at the detailed assessment stage, and was not required on ordering a payment on account.

In the second case, Legg and others v Sterte Garage Ltd and another [2016], the Court of Appeal applied for perhaps the first time, the concept of non-party costs order liability to casualty insurers.

The claimants were a group of residential property owners (Legg), whose homes are located near the first defendant’s (Sterte) garage, and who in 2008 brought proceedings for loss caused by Sterte’s negligence and nuisance causing a significant diesel spillage in 1997, which affected their properties. The second defendant, Aviva, was Sterte’s public liability insurers who provided cover, and supported the litigation. It became clear that the cause of the damage, a long term leak, was not covered under the policy, and Aviva withdrew cover and funding of the litigation. Sterte went into liquidation, which resulted in judgment in default of a defence being entered against Sterte, who were unable to pay the judgment sum and the costs ordered.

The Court of Appeal relied on the five principles established in TGA Chapman Ltd v Christopher [1997]5needed to make a non-party costs order against an insurer, namely that the:

  1. Insurer determined that the claim would be fought.
  2. Insurer funded the defence of the claim.
  3. Insurer had the conduct of the litigation.
  4. Insurer fought the claim exclusively to defend their own interests.
  5. Defence failed in its entirety.

The court found that each one of these was satisfied entitling it to dismiss the appeal and make a non-party costs order against Aviva, who they held had failed to show the lower court’s exercise of discretion was in any way flawed. Agreeing with the lower court that Aviva was acting predominantly in its own interest in defending the claims, the purpose in doing so was not to protect Sterte against an award of damages, but to seek to defend a claim, which as pleaded fell within the cover provided. The Court of Appeal added that Aviva would have an answer to the claim for a non-party costs order against them had the claimants abandoned the 1997 claim.

To our knowledge this is the first time in which a non-party costs order has been made against a casualty insurer, as opposed to for example, an indemnity insurer, highlighting the court’s willingness to extend non-party costs orders to those outside the usual grouping.

The case is also an example of where a third party claimant may rely on the Third Parties Act 1930 to recover its costs directly from the liability insurers of an insolvent defendant. This element of the case is examined in more detail in our Insurance Bulletin dated 17 March 2016, available at http://www.hfw.com/Insurance-Bulletin-17-March-2016.

HFW perspective

As seen above, the principles relevant to determining whether to exercise discretion and order a section 51 SCA non-party costs order now focus on whether the order would be just in the circumstances of the case, looking at the non-party’s relationship to those it is funding and to the litigation, and whether they are exercising an element of control.

The categories of those caught by a non-party costs order have been extended by Legg v Sterte, to include casualty insurers, and we expect to see the courts further widen the net of those caught in its discretion. Those considering funding should therefore consider their own position and take care not to act in any way that might suggest they are controlling or benefitting from the litigation.