Laughing all the way to the Bank: Widening the scope of Third Party Costs Orders?19/08/16
by Joseph de Lacey and Harshini Ranchhod
Commercial litigation is an expensive undertaking. A contested claim will likely last a number of years, while court and solicitors’ fees have never been higher. For most parties, a form of funding is likely necessary.
Recent years have seen a huge growth in the number of commercial litigation funders. The development of this market has been accompanied by the development of case law concerning third party costs orders – that is, the rules governing the power of the court to order that the costs of a claim (usually the solicitors’ and/or barrister’s costs) be paid by someone who is not technically a party to the claim. The position for commercial funders is reasonably simple – where a commercial funder has funded the losing party in a civil claim, it may be ordered to pay the costs of the winning party, where the losing party is not in a position to pay the winner’s costs itself. The amount that the funder can be ordered to pay is at present capped at an amount equivalent to the amount provided in funding.
But what is the position where someone other than a professional, commercial funder supports a claim? The position has been somewhat clarified by a recent decision, in the context of a dispute over ownership of a Banksy mural.
The Creative Foundation v Dreamland Leisure Limited and others  EWHC 859
The Creative Foundation v Dreamland Leisure Limited concerned competing claims to ownership of an artwork painted on to the side of a building in Kent by the artist Banksy. The mural appeared on the back of the building in September 2014. In November 2014, Dreamland Leisure Ltd (Dreamland), the tenant of the building (but not its ultimate owner), removed the mural and sent it to the US to be sold.
Title (ownership) to the mural, and to the cause of action against Dreamland, was purchased by the Claimant, The Creative Foundation (the Foundation), which launched legal proceedings to recover it. In 2015 it applied for and was granted summary judgment. Dreamland lost its claim and was ordered to deliver the mural to the Foundation.
The Costs of the Claim
Having succeeded in its claim, the Foundation naturally turned its attention to recovering its costs from the losing party. This is because the normal rule in the courts of England and Wales is that the loser pays the winner’s costs (or at least a proportion). Accordingly, the Foundation’s normal recourse would have been to apply for an order that Dreamland pay for its costs on the standard basis (where the Foundation would expect to recover around 60-70% of its costs) or the indemnity basis (where, if ordered, the Foundation could expect to recover around 85% of its costs).
Dreamland however was not in a position to pay. It had ceased to trade and the Foundation was placed in the line of unsecured creditors. The Foundation’s choice was to wait to see if there was any money left once Dreamland had paid all its secured creditors, or to try to find someone else who could or would pay. It therefore made an application to the court for an order under section 51(3) of the Senior Courts Act 1981 that a Mrs Godden pay its costs. Who was Mrs Godden? The mother of the directors of Dreamland.
Order for costs/ Principles
The general rule is that an order for costs against a non-party may only be made in exceptional circumstances (defined as no more than outside the ordinary run of cases where parties litigate at their own expense) and where it is just and equitable to order a non-party to pay costs.
‘Pure funders’, being those with no personal interest in the litigation, who are not funding it as a matter of business and in no way control the litigation (think, for example, of a generous benefactor) are not appropriate parties for third party costs orders.
Where a non-party substantially controls the litigation, funds it and stands to benefit from it (this does not refer only to financial gain, but also, for example, reputational gain) the courts will ordinarily require that party to pay the successful party’s costs. In these circumstances, the court justifies this rule by reason of the fact that the party is not simply facilitating access to justice – it is gaining access to justice for its own purposes. It is the real party to the litigation.
The Foundation’s application for a costs order
In support of its application, the Foundation argued that Mrs Godden:
had funded the defence of the proceedings by paying the fees of the solicitors and barristers;
stood to benefit from a successful defence, in that the sale proceeds from the mural would go to her and a charity with which she was involved; and
had substantially controlled the defence.
Mrs Godden accepted that she had paid for a considerable portion of the Defendants’ costs of, but disputed that she stood to benefit from a successful defence or that she had controlled it.
The court considered the evidence before it and found that:
Mrs Godden had paid the entirety of the fees and disbursements charged by the Defendants’ solicitors and counsel until the conclusion of the summary judgment hearing (which the Foundation had won). It was clear that but for her support, Dreamland could not have funded the defence of the claim;
Mrs Godden stood to benefit from the success of the defence – if Dreamland had won, she would have been the principal beneficiary in that sums raised by the sale of the mural would have benefited her and a charity with which she was emotionally involved; and
Dreamland had chosen Mrs Godden to give evidence at the summary judgment hearing – this was because she was the one most closely involved in dealing with the mural. She was actively and closely involved in the proceedings and as such it could be inferred that she had some control over them. It did not matter that her two sons, the directors of Dreamland, took the ultimate decisions.
The result of the above was that Mrs Godden was a real party to the proceedings, notwithstanding that her name was not listed as a claimant or defendant. The Foundation’s application was allowed, and Mrs Godden was found liable for the Foundation’s costs from the date Dreamland gave notice that it would defend the proceedings.
It is an important principle of English law that the losing party in a civil claim should pay (at least a proportion of) the successful party’s costs. It is a principle of fairness and a means of encouraging those with weak claims or defences to settle at an early stage.
In most cases, the loser who pays will be a party to the proceedings. However, in certain circumstances, where that person or company cannot pay, the courts are willing to look for another party which can, and order it to do so.
While at first sight this principle appears fair and just, it may have the unintended effect of inhibiting access to justice. Today it is becoming increasingly difficult for ordinary people and companies to fund litigation, and help is going to be required. This help may come from family members, business associates, or commercial litigation funders. If the courts continue to expand the category of persons who might be subject to a third party costs order, it may be that benefactors as described above will be less inclined to offer assistance.
How can we help?
Harcus Sinclair LLP frequently represents clients on conditional fee arrangements. The firm also has strong relationships with commercial funders and with after the event (ATE) insurance providers. We are therefore experts in conducting litigation for parties who cannot afford to fund a claim directly. If you are interested in discussing these opportunities and options with a member of our team, please call us on 0207 242 9700.
 Section 51 of the Senior Courts Act 1981 – see http://www.legislation.gov.uk/ukpga/1981/54/section/51
 Civil Procedure Rules, Part 44, 44.2 (1) (a)
 Dymocks Franchise Systems (NSW) Pty v Todd  UKPC 39
 Europeans Ltd v Commissioners for HM Revenue and Customs  EWHC 948 (Ch)
 Dymocks Franchise Systems (NSW) Pty v Todd
 Re North West Holdings plc  EWCA Civ 68