Have you considered liability for costs?
Any person or company pursuing or defending a claim in litigation, must consider costs. Not just their own, but also the costs of their opponent. This is because courts can require one party to pay another’s legal costs. The general rule is that the losing party in a case is the one who pays.
In fact, the Court’s discretion extends to parties with no direct involvement in the case (‘a non-party’). This might arise when a non-party decides to fund the legal costs of a party which is involved in a case. Quite apart from any philanthropy – litigation is often a far stretch from being a charitable cause – a non-party may have a real interest in the outcome of a claim, and therefore, may want to drive the pursuit or defence of a case which might otherwise lapse without them doing so.
Non-party funding is an acceptable practice, which the law has no desire to discourage. However, the law does consider that all parties responsible for driving litigation should be exposed to the full costs consequences of doing so. After all, why should a party stand to benefit from litigation without bearing the inherent risks?
Funding alone will not make a non-party liable. Indeed, there is a whole commercial sector dedicated to the funding and insuring of litigation, by businesses with an exclusive interest in making profit. Such businesses might offer funding on purely commercial terms, that is to say with reference only to the objective merits of a given case. The court has no desire to hold these businesses responsible for enabling litigation.
What is the key test?
The key test is to determine whether the non-party is in fact in any sense a real party to a case, and for this exercise, the following factors will be relevant:
- all the ways in which the non-party stands to benefit from the litigation
- whether the non-party is exercising some form of control over decision-making in the litigation
- whether or not the funding is repayable, and repayable with interest
- whether funding is being made available, regardless of the objective merits of the case.
How do costs risks apply to group companies?
Non-party costs risks are relevant to group companies. The general rule is that companies stand as individual legal entities and cannot be held liable for the debts of their fellow subsidiaries. The court’s above discretion on costs, overrides this rule, and in the recent case of Montpelier Business Reorganisation Ltd v Armitage Jones LLP, one company was held liable for costs in a case which had been pursued, unsuccessfully, by another company within its group. In that case, the non-party was considered to have been used as a funding vehicle to help drive the litigation and protect the real party from costs risks. Borrowing a phrase from Fisher J in the New Zealand case of, Arklow Investments Ltd v MacLean, the court said it would be wrong “to allow someone to fund litigation in the hope of gaining a benefit, without the corresponding risk that that person will share in the costs of the proceedings if they ultimately fail.”
Funding the costs of litigation might be considered a necessary and sensible business decision; however, it is also a precarious practice: being removed from the proceedings is no shield to the risks of costs liability. Companies within a group may appear to stand separately form one another, but the court will recognise any common controlling features and objectives, and use non-party costs orders to bridge this separation.
How can we help?
If you are concerned about the risks of non-party costs orders, please contact Mark Ridley in BakerLaw’s Commercial Dispute Resolution Department at mark.ridley@baker-law.co.uk or call 01252 730753.
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