The usual rules on costs in litigation provide that the losing party is liable for the other party's costs. However, the Civil Procedure Rules allow the Courts discretion to not only decide who will be liable for costs in litigation but also to order costs to be paid by a third party. The recent case of Goknur v Organic Village Ltd and another provides some guidance as to when the Court may make such an order.
The Claimant's case against the Defendant was struck out by the Court and the Claimant was ordered to pay the Defendant's legal costs. The Claimant obtained a default costs certificate in respect of its counterclaim costs. The Claimant also applied for an order requiring the Defendant to commence detailed assessment proceedings regarding its defence costs. The Defendant failed to comply with a Court order requiring commencement of detailed assessment proceedings by a certain date so its costs were disallowed and it was required to pay £185,300 into court, representing payments on account of its defence costs previously paid by the Claimant.
However, the Defendant did not have the financial means to make payment. The Claimant therefore applied for a third-party costs order against the Defendant's Managing Director (the "Director"), on the basis that he controlled the Defendant's participation in the case and provided a guarantee in respect of its legal fees in the event of non-payment by the Defendant (The Director was also a defendant in the proceedings, but this role is not relevant for present purposes.)
Third-party costs orders
The Court declined to make a third-party costs against the Director. This was for a number of reasons:
- Previous authorities had established that where a third-party does not just fund proceedings but also "substantially controls or stands to benefit from them", justice would usually require them to pay the costs of the successful party;
- In respect of the Director, although he controlled the Defendant and the litigation, "something more" was required in the case of a company director (the authorities cited included improper conduct or a claim made in bad faith as possible examples);
- The mere fact that a director who controls the litigation also funds the claim is not enough to justify a third-party costs order ;
- The Director's funding was limited to providing security for the solicitor's fees and had only commenced halfway through the litigation; and
- The Claimant's argument that the proceedings were pursued substantially for the Director's benefit was rejected as it was the Defendant that had stood to gain most by extinguishing or reducing its indebtedness.
Points to note
- It is important for third parties to litigation to be mindful of their level of involvement and conduct in the litigation in order to avoid being susceptible to a third-party costs order.
- When making an application, a compelling reason will need to be demonstrated for a costs order to be made against a third party i.e. something more than simply funding a litigation.
- In particular, this decision suggests that a key guiding factor for the Court will be who really stood to gain from the litigation. Where a third party is funding and directing litigation principally for its own benefit, it may be at risk of facing a third party costs order.