Last month, the Supreme Court affirmed a 2011 decision of the High Court that a third party who funds litigation, although they are not a party to the proceedings, may be liable for legal costs incurred by the other side. The High Court Judgment was considered a landmark development in the law on litigation costs.
A group of companies owned and controlled by Mr Brian Cunningham (“the Cunningham Group”) initiated a number of law suits against 1) First Active plc, 2) Ray Jackson acting as receiver over certain assets of the Cunningham Group and 3) Bernard Duffy who purchased certain property previously owned by the Cunningham Group. All of the proceedings were unsuccessful and costs orders were made against the group companies.
First Active plc brought an application to the High Court to hold Mr Cunningham, in his capacity as director and shareholder of the companies, personally liable for the costs orders against the relevant companies. It was argued that Mr Cunningham was the funder of the litigation and was at all times in control of the litigation. Mr Cunningham unsuccessfully resisted the application and appealed the High Court decision.
Is a warning to the non-party funder essential?
In this case, First Active plc wrote to the Plaintiff companies in February 2008 warning them of the possibility of an application for a costs order against the funder of the litigation, who was a not a party to the proceedings. The Supreme Court discussed this issue in depth and decided that the giving of notice is an important factor in making an Order for costs against a non-party (a “Moorview Order”). Notice to the non-party is one element that the Court will consider when hearing an application for a Moorview Order, although it is not a mandatory precondition to granting a Moorview Order.
It should be noted that, contrary to this Supreme Court decision, the Court of Appeal (Hogan J.) in WL Construction Limited v Chawke and Bohan  IECA 113 found that the giving of notice to the non-party prior to the conclusion of litigation is a pre-requisite to making a Moorview Order. The decision in Chawke has been appealed to the Supreme Court and judgment is awaited.
The Supreme Court’s Finding
The Supreme Court found that that the Courts have the power to make an Order for costs against a non-party in certain instances and set out a non-exhaustive list of factors to take into account when making a Moorview Order, as follows:
- The reasonableness to think that the company could meet any costs if it failed;
- Whether the non-party would benefit from the litigation if successful, including whether it had a direct personal financial interest in the result;
- The extent to which the non-party was the initiator, funder and/or controller of, and moving party behind, the litigation;
- Any factors which may indicate whether the proceedings were pursued reasonably and in a reasonable fashion;
- Whether there was any finding of bad faith, impropriety or fraud, although this is not a requirement for an Order; and
- Whether the non-party was on notice of the intention to apply for a non-party costs order, the point in the litigation such notice was communicated and the extent of the notice so provided.
The Supreme Court agreed with the High Court’s findings that Mr Cunningham funded the litigation and was in control of the litigation.
The Judgment can be viewed here.
The Court’s purpose for making a Moorview Order is to prevent an injustice from being done to the party who otherwise cannot recover their costs.
A Moorview Order is more likely to be granted where the non-party is put on notice during litigation that an application for an Order may be made.
In many instances, proving that a third party is funding and controlling litigation may be difficult. An alternative to applying for a Moorview Order, and producing the proof that goes with it, is seeking “security for costs”. Section 52 of the Companies Act allows the Court to order a plaintiff company to provide security for costs. If it appears that a plaintiff company in any action is insolvent, and will not be in a position to pay the costs of the defendant if the matter is successfully defended, the Court may require security to be given for those costs and the law suit may be put on hold until such security is given.
Shareholders, directors and/or creditors of a company who invest money in a company in litigation are not automatically third party funders. There are many situations where interested parties would undoubtedly benefit from a company succeeding in litigation. However, a liability to costs as a non-party will only arise if the Court finds that the non-party took certain actions which led to further costs being incurred by the successful party.
Shareholders, directors and/or creditors should be wary that a Court may look beyond the veil of incorporation and hold them personally liable for the costs of the other side.