Winning a case against a litigant unable to satisfy a costs order is notoriously frustrating to clients. That is all the more true when there are suspicions as to whether or not the unsuccessful party was wholly in control of the conduct of the litigation. Hence the temptation of applying for a non-party costs order under section 51 of the Senior Courts Act 1981 and CPR 48.2. CPR 48.2(1) provides:

"48.2 – (1) Where the court is considering whether to exercise its discretion under section 51 of the Senior Courts Act 1981 (costs are in the discretion of the court) to make a costs order in favour of or against a person who is not a party to the proceedings –

a) That person must be added as a party to the proceedings for the purposes of costs only; and

b) He must be given a reasonable opportunity to attend a hearing at which the court will consider the matter further."

The apparent simplicity of section 51 and CPR 48.2 are beguiling. Nevertheless, as the ever-expanding commentary in the White Book might suggest, matters are not as simple as they seem. An executive summary of the eleven pages of this in the 2013 edition would note simply that there is a raft of decisions enjoining courts not to make such orders in the ordinary run of cases. These include, at Court of Appeal level only, Symphony Group plc v Hodgson [1993] 4 All ER 143, Globe Equities Ltd v Globe Legal Services Ltd [1999] EWCA Civ 3023 and Hamilton v Al Fayed (No 2) [2002] EWCA Civ 665.

Aside from often understandable feelings of grievance, the reason applications for third party costs orders continue to be made despite these authorities is that there have been a number of cases in which courts have found that third parties have crossed the critical line between funding an action and controlling or directing the action. While many of those cases are first instance authorities, some have been approved (even if only as defensible exercises of the discretion) by the Court of Appeal. A particularly important judgment in this respect is Petromec Inc v Petroleo Brasileiro SA v Petrobras [2006] EWCA Civ 1038, in which Laws LJ commented that the exercise of the discretion had become overburdened by authority and was "not confined by specific limitations".

For as long as the authorities continue to turn on some fine and not always comprehensible distinctions it is therefore unsurprising to see attempts to push the envelope of third party costs orders. One such attempt was made in Flatman v Germany [2013] EWCA Civ 278.

Flatman v Germany [2013] EWCA Civ 278

In two joined cases, insurers sought and successfully obtained from Eady J wide-ranging disclosure to enable them to consider whether to bring third party costs proceedings against a firm of solicitors. The essential argument advanced (in much more complex form) was that because the solicitors had funded disbursements then they had crossed the line into "controlling" the litigation, to which they could in some sense be described as a party because they were financially benefitting from its continuation. That was an argument that had found favour with Eady J, who held that as a matter of principle if a funder is "a real party" in the sense that he has an interest in the outcome of the litigation it may not matter that it would be inappropriate to describe that funder as "the real party":

"It may suffice, depending upon the circumstances, that the funder has something to gain alongside the nominal party. In the case of a solicitor, for example, it is not necessary to demonstrate that in the event of the litigation leading to a successful outcome he would be the sole beneficiary. Even though his client may recover compensation for himself, the solicitor could still be regarded as benefiting, or potentially benefiting, from the case to the extent that a costs order should be made against him."

This approach was of concern to the Law Society, which intervened in support of the solicitors in the Court of Appeal. Its position was that:

"A solicitor who funds disbursements on behalf of a client on the basis that the costs will be recovered from the other side in the event of success but will not be recovered from the client if the claim fails (at least in cases, such as these, of moderate complexity in which the disbursements are modest) is not acting in circumstances which are outside the ordinary run of cases. Neither can it be said, it is submitted, that the solicitor is either 'the real party' to the litigation, the person 'with the principal interest' in its outcome, or is acting 'primarily for his own sake'. Thus, without more, the solicitor should not be made liable to a third party costs order."

(Flatman v Germany [2013] EWCA Civ 278 at paragraph 31.)

That position was accepted by the Court of Appeal at paragraph 47 of their judgment. An interesting nuance, however, is that as Eady J had ordered disclosure of material that could lead to a third party costs application, and that disclosure had not only been given but in the joined case of Weddall v Barchester Heath Care Ltd contained very striking material (including material that suggested the solicitor respondents had continued with the litigation despite client instructions not to do so), the appeal was dismissed. This left the Court of Appeal in the position of explaining why it was that the order that had, as a matter of fact, disclosed material plainly supportive of a CPR 48.2 application should, as a matter of principle, not have been made. Leveson LJ commented as follows:

"I appreciate that what has emerged in Weddall would not normally become known to a successful opponent in the absence of some sort of disclosure. I equally recognise that insurers will not wish to go to the expense of a costs assessment and enforcement exercise against an impecunious litigant simply in the hope that some detail will emerge which might alert them to the prospect that costs might be recovered against the solicitor. It is, however, a comparatively straightforward matter to deal with. The Law Society makes it clear that if solicitors have agreed to indemnify their client (as is entirely lawful: see Sibthorpe), the solicitors could not then seek to deny the existence of that indemnity or prevent their client from relying upon it. For my part, without seeking disclosure of documents, I see no reason why a successful insurer should not obtain an order for costs in principle against the claimant, together with an interim payment on account and invite the claimant to reveal the extent to which the litigation had been supported by any third party and to provide any reason why the costs order should not be enforced. I appreciate that it will not assist in many cases: examples such as Weddall, however, stand a prospect of being exposed thereby permitting the insurer to decide what, if any, further steps need to be taken."

(Flatman v Germany [2013] EWCA Civ 278 at paragraph 54.)

In the first instance, therefore, the Court of Appeal’s guidance is clearly to ask the telling question in correspondence rather than to proceed through the costs of an assessment in a Micawber-like fashion to see if something comes up. Underlying such an approach is the issue of proportionality, at the forefront of Centrehigh Ltd v Karen Amen and others [2013] EWHC 625 (Ch).

Centrehigh Ltd v Karen Amen and others [2013] EWHC 625 (Ch)

Once the decision is made to apply for a third party costs order, and once disclosure has been ordered, the ensuing question is how the hearing of that application should be conducted. That is a question that has rarely been considered in any detail. In the leading case of Symphony Group plc v Hodgson [1993] 4 All ER, Balcombe LJ had held that:

"The procedure for the determination of costs is a summary procedure, not necessarily subject to all the rules that would apply in an action… in the summary procedure for the determination of the liability of a solicitor to pay the costs of an action to which he was not a party, the judge's findings of fact may be admissible. This departure from basic principles can only be justified if the connection of the non-party with the original proceedings was so close that he will not suffer any injustice by allowing this exception to the general rule."

(Symphony Group plc v Hodgson [1993] 4 All ER as cited in Centrehigh Ltd v Karen Amen and others [2013] EWHC 625 (Ch) at paragraph 32 (with internal citations omitted).)

It is also clear from the authorities that where there has been a trial, section 51 applications are best made before the original trial judge, who may determine them without giving rise to concerns as to possible bias. That is clearly the best way to proceed; many of the more surprising successes in section 51 applications have come before judges who have, through the course of the underlying proceedings, formed strong views as to the conduct of third parties involved in the litigation: see, for example, Chantrey Vellacott v Convergence Group plc [2007] EWHC 1774 (Ch) and Legal update, Company's failed negligence action against its accountants leads to costs orders against non-party director (www.practicallaw.com/6-375-1132).

The much more difficult question, which arose in Centrehigh, was what procedure should be followed when there had been no trial and where there had been a delay of several years between the original action and the third party costs order application.

That question came into sharp focus at a pre-trial review at which the claimants applied for permission to cross-examine eight individuals who had given statements in support of the fourth and fifth defendants.

Morgan J rejected that application. He accepted that the court does have jurisdiction to order cross-examination of witnesses in a third party costs order application (Greco Air Inc v Tilling [2009] EWHC 115 (QB)) but held that as a matter of principle it was not appropriate to treat a section 51 application as if it were a full trial:

"The question can, therefore, be asked, why should not an applicant for a s.51 order have just the same entitlement to full pre-trial and trial procedures as any other applicant to the court for relief? In my judgment, the approach adopted in the cases to which I have referred appear to have taken the line, as a matter of policy, that s.51 applications are to be kept within proper bounds, and the court is to do the best justice it can without in every case having the full procedures pre-trial and at the trial."

(Centrehigh Ltd v Karen Amen and others [2013] EWHC 625 (Ch) at paragraph 41.)

The litmus test was one of proportionality: seeking to build a case by cross-examining eight witnesses over some three extra days of court time was not a proportionate exercise, notwithstanding the relatively substantial sums in dispute.

Comment and practical learning points

  • The decisions in Flatman v Germany and Centrehigh show the practical limitations of section 51 applications. The lessons that practitioners will take from these cases are as follows:
  • The test for securing third party costs orders is exacting.
  • Such applications are best made in the immediate aftermath of trial before judges who have formed a dim view of parties who, while technically third parties, will have been seen by all involved in the original trial to be either de facto parties or playing a substantial role in the proceedings.
  • In applications made in the aftermath of trial it can be possible to persuade the court of propositions of law that would be more difficult to advance before a judge coming to a case cold.
  • If a stand-alone application is being made before a judge not previously seized of the matter, securing the disclosure necessary to begin to make out an application is challenging as a matter of law and has been made more so by Flatman v Germany.
  • Even where such disclosure has been obtained by another route (in Centrehigh, much was obtained from a liquidator), it is now plain that one cannot simply proceed to a full hearing as if this were a standard piece of litigation. Instead, one needs to show that any proposed directions are proportionate to summary proceedings.

Both Flatman v Germany and Centrehigh suggest that the courts are keen to keep section 51 applications within relatively tight bounds to avoid the risk of complex satellite litigation. Given much commentary highlighting the relatively wide range of circumstances in which section 51 orders can be made, practitioners would be well advised to consider the practical limitations exposed by these decisions before proceeding with such applications.