The recent case of Justmahe Inc v Marinika Yevgenyevna Smirnova (2016) is the latest in a number of cases in which a person not a party to a case is ordered to pay the costs of the litigation at the end of proceedings. It is a good example of the court exercising its inherent discretion in determining what would be a just outcome and should serve as a warning to those involved in influencing litigation, but on the face of it distanced from it by a corporate veil, not to assume that their position is risk-free.
The claimant was Justmahe Inc, a BVI company of which “W” was the only director, employee and shareholder. The proceedings against the defendant came to a close when the claim was struck out owing to the claimant’s failure to provide security for costs. The claimant had no assets and the defendant sought an order against W pursuant to section 51 of the Senior Courts Act 1981 that W be required to pay personally the defendant’s costs of the action.
The defendant contended that the proceedings had been effectively brought by W for W’s own benefit rather than for the claimant’s. W made all the witness statements for the claimant and, the defendant claimed, funded the proceedings. When costs orders had been made in the Defendant’s favour during the course of proceedings, the claimant had failed to pay.
The claimant argued against the third-party costs order on grounds that it had had no warning of the application and there were no exceptional circumstances. This argument was influenced by previous case law, which established that exceptional circumstances are required before the court will make an order for costs against a person who was not a party to the litigation.
Under section 51 of the Senior Courts Act 1981 the court has a wide discretion as to whom it may order to pay costs and in what amount. Section 51(3) provides: “The court shall have full power to determine by whom and to what extent the costs are to be paid.” Case law has considered the application of this rule and the following points have been established:
- Although costs orders against non-parties are to be regarded as “exceptional”, as they are rarely appropriate, exceptional in this context only means outside the ordinary run of cases, with ordinary being where parties bring or defend cases for their own benefit and at their own expense.
- Generally speaking the discretion will not be exercised against “pure funders”, i.e. those with no personal interest in the litigation, who do not stand to benefit from it, are not funding it as a matter of business and do not seek to control its course.
- Where a non-party funds the proceedings and also controls them or will benefit from them, justice will ordinarily require that, if the proceedings fail, that party will pay the successful party’s costs. The non-party is the “real party” to the litigation.
- The most difficult cases may be those in which non-parties fund receivers or liquidators in an effort to advance the funder’s own financial interests.
The judge in this case held that the only immutable principle was that the court’s discretion had to be exercised justly. He held that W funded the proceedings on behalf of the claimant, controlled them and would benefit from them. Effectively, W was the real party and the judge considered that that was in itself sufficient to make the case exceptional. The judge held on the facts that whether the claimant had had warning of the application or not would not have made any difference to his conduct. Justice required that if the proceedings failed, the third party would have to pay the defendant’s costs. An order for costs was made against W.
The case serves as a reminder to anyone involved in litigation that the court may make any order as to costs that it considers to be just. Particular care should be taken by people with a 100% shareholding in one of the parties as this may indicate to the court that they may control the party and/or stand to benefit from the litigation. If this is the case, ensuring that the company complies with costs orders made against it, or demonstrates that it has assets available to meet any liability that may arise, is likely to make a third party costs order unnecessary.
For more information about the issues in this article or to find out more about how the Dispute Resolution team can help you please contact a member of the team.
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