As experienced practitioners well know, the costs of litigation and, more importantly, who pays them, often carry as much significance to the outcome of a case as the legal arguments in play.
Whilst in the normal course of things, costs will be borne by the losing side, Rule 44 of the Civil Procedure Rules and section 51 of the Senior Courts Act 1981 grants the court a general discretion to decide who will be held liable for the costs incurred by the respective parties. CPR 46 extends the scope of that discretion and permits courts to order that the costs of litigation be paid by a person who was not a party to the litigation i.e. by a “non-party” (often referred to as a “third party”).
In general, this power can only be exercised where a third party has funded and substantially controls the proceedings in question – the rationale being that such parties, who seek to benefit from the litigation, should also bear the risks that arise from it. However, the area remains a somewhat uncertain one so the recent guidance from the High Court in Goknur Gida Maddeleri Enerji Imalat Ithalat Ihracat Ticaret Ve Sanati AS v Organic Village Ltd and another  EWHC 2542 (QB) is most welcome.
In Goknur, the claim against the Defendant was struck out and the Claimant was ordered to pay the Defendant’s legal costs, to be assessed, if not agreed. The parties were unable to agree upon those costs so the Claimant applied to court for an order requiring the Defendant to commence detailed assessment proceedings.
That order was granted but the Defendant failed to commence the costs proceedings in time so its own costs were disallowed and it was further ordered to pay into court the sums that it had previously received from the Claimant on account of its costs, which totalled £185,300.
The Defendant did not have the means to pay, so the Claimant applied for a non-party costs order against Mr Aytacli, the Defendant’s former managing director.
In dealing with such applications, the courts shall consider not only the conditions that must be satisfied for an order to be granted but also the procedural points that must be adhered to.
- Who will hear third party costs applications?
It is a well-established principle that any application for a third party costs order should be dealt with by the trial judge, except in “rare and exceptional” circumstances.
In Goknur, the Claimant’s application failed to take account of that principle and simply stated that the application should be heard by “[trial judge], if available, or any other QBD judge”. As a result, a different judge was assigned to the costs hearing.
The judge raised the oversight with the parties but accepted that exceptional circumstances did exist in that instance and decided that it was in the interests of justice for him to hear the application.
Those exceptional circumstances included:
- The fact that a reallocation would result in lengthy delays and further costs and inconvenience to the parties
- The fact that neither party would suffer any prejudice as a result of a judge other than the trial judge hearing the application
- (Although not determinative) the fact that the parties were content for him to hear the application
In reaching his decision, the judge nonetheless conveyed his concern at the procedural error and expressed his sincere hope “that future applicants for non-party costs orders will not repeat the error made in this case”.
- The Decision
Having satisfied himself that he could hear the application, the judge proceeded to dismiss it.
He held that the mere fact that a director who controlled the company’s litigation also funded the claim was not enough to justify a non-party costs order against that director. Rather, there needed to be “something more” – for example, that the claim was not being pursued for the benefit of the company but for the director’s own personal gain.
The judge considered a number of other factors including the extent to which Mr Aytacli:
- Was in control of the litigation
- Was funding the litigation
- Stood to benefit from the litigation
but found that while Mr Aytacli had, as sole director of the Defendant, exercised a high degree of control over the litigation, his funding of the litigation was limited to providing security for the Defendant’s solicitors fees, which only commenced about halfway through proceedings.
Furthermore, the judge disagreed with the Claimant’s argument that the proceedings were pursued substantially for Mr Aytacli’s benefit, instead finding that the company would stand to gain most, by reducing or even extinguishing its indebtedness.
Accordingly, the judge concluded that it would be unjust to make a third party costs order in all the circumstances and rejected the Claimant’s application.
The judgment not only provides helpful guidance on the circumstances in which a court will grant a non-party costs orders but also highlights an important procedural point regarding the hearing of such applications.
Parties seeking such an order must ensure that their application (or supporting witness evidence):
- Clearly specifies that it should be heard by the trial judge, or else identifies the exceptional circumstances that allow the court to deviate from that position
- Demonstrates that there is a compelling reason – i.e. “something more” than the mere fact that the third party concerned funded the litigation – for a costs order to be granted against that third party