In litigation under the Civil Procedure Rules, which include most commercial litigation, the general rule is that the losing party pays the winner’s costs. However, the court also has a jurisdiction under section 51 of the Senior Courts Act 1981 to order costs against a non-party to the court proceedings.
Targets for such applications have included, with varying degrees of success:
- professional funders;
- those involved with companies such as company directors, shareholders, liquidators, receivers and creditors;
- trade unions;
- family and friends.
Although costs orders against non-parties are described as “exceptional”, here that means “outside the ordinary run of cases where parties litigate for their own benefit and at their own expense”, so they may not be quite so “exceptional” in practice.
Generally, “pure funders” will escape the net, meaning “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 in no way seek to control its course”. Such funders need to resist the temptation to control its course. That may be a strong temptation, for example, even if they do not stand to benefit directly from the litigation, the litigant may only be in a position to repay them if successful.
Friends and family
In Kazakhstan Kagazy Plc v Zhunus (formerly Zhunussov)  EWHC 2630 (Comm) the court granted a non-party costs order against the wife and mother-in-law of the second defendant who had funded his unsuccessful defence of a very substantial fraud claim. The wife and mother-in-law argued that they were “pure funders” as above. The court rejected this argument. It was said that the wife’s funding of the costs had begun shortly after she received more than $181 million from the trust in which the defendant had an interest and the wife and mother-in-law lived an extravagant lifestyle. If the claims against the defendant succeeded, that lifestyle might be at risk. So, they had an interest and it was just to make an order.
In Arkin v Borchard Lines Ltd and others  EWCA Civ 655 the court said that a professional funder who financed part of the costs of litigation should be liable for the other side's costs, to the same extent as it had funded the costs of the losing litigant. The funder was ordered to contribute £1.3 million to the costs of the defendants when the claim failed (the same as it had paid in exchange for a percentage of the recoveries in the event of a win).
The Arkin guideline – the principle that commercial litigation funders should have their adverse costs exposure limited to the amount of their financial contribution - now applies. However, the courts have subsequently shown themselves willing to exceed this cap. Arkin is a way to achieve a just result, not a rule to be applied automatically.
In Burnden Holdings (UK) Ltd and another v Fielding and another  EWHC 2995 (Ch), the court applied Arkin beyond the typical professional funder scenario, making a non-party costs order against a firm which funded unsuccessful proceedings brought by one of its partners as liquidator of a company and stood to gain from them. Applying the Arkin cap struck a fair balance between the defendants' entitlement to costs and the risk of discouraging funding which helped access to justice.
Considerations whether to make an order
There is no “checklist”, but considerations include the following:
- A non-party costs order is more likely to be made when the applicant can show improper conduct, but it is not a requirement.
- Pure funders will usually escape a non-party costs order.
- An order for costs will not normally be made against a non-party where the applicant has a legal claim against the non-party and could have joined him as a party to the original proceedings.
- It is not necessary for the non-party to be made exclusively liable for the costs. The court may make an order that they be liable jointly and severally with existing parties. The order may be limited to only part of the costs, particularly where there is an issue about the extent to which the costs in question were caused by the non-party.
- In all the circumstances of the specific case, is it just to make the order?
Non-party costs orders are an important part of the litigation armoury, especially in cases where the named party to the litigation may not be able to pay. They sit alongside solid case preparation and other tools such as well-placed offers and applications for security for costs which are further topics in themselves.
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