The difference a bit of notice could make…

The court’s discretion to make a non-party costs order (“NPCO”) against a director of a defendant company was considered by the Court of Appeal in Sony/ATV Music Publishing LLC and Another v WPMC Limited (In Liquidation) and Another and David Bailey [2018] EWCA Civ 2005.

The director (Mr Bailey) had taken control of WPMC Ltd which was embroiled in a copyright dispute with the Claimants/Respondents and continued with its defence to the claim with a view to protecting its one asset, a Documentary that was the subject of the copyright dispute. Arnold J made the NPCO after determining that Mr Bailey had funded and controlled the defence to the claim and would have been its sole beneficiary had it succeeded. He found that Mr Bailey was “the real party” and the failure of the Claimants to put Mr Bailey on notice that it would seek their costs against him personally would not have made any difference to his conduct in the defence to the claim.

Mr Bailey’s position, in short, was that he had acted in the interests of the shareholders and the fact that he was the sole shareholder was of no consequence. Another factor the court had to take into account was the fact that he was not the only party to have an interest in the outcome of the litigation. There was a creditor who was owed £1.1m. Mr Bailey maintained that had he been put on notice of an application for the NPCO, he would have protected his position by way of ATE insurance, sought to settle the case before substantial adverse costs were incurred or paid the interim costs award with a view to pursuing an appeal which, based on the legal advice he had received, had good prospects of success.

The Court of Appeal held that, although Mr Bailey may be said to be “a real party” if not the only one, the absence of any form of warning was fatal to the application for the NCPO. Mr Bailey had been deprived of realistic opportunities to abandon the defence or settle the litigation at an early stage or to otherwise protect himself against the adverse effects of a NPCO.

This is an interesting case on the difficulties the courts face on NCPO applications against company directors. The court must weigh up a director’s duties to protect shareholders’ interests against the director’s own interests. The Judgment provides a detailed review of the recent case law pertaining to NCPOs and includes a reminder (at paragraph 70) that there is a distinction between (a) cases in which the “real party” to litigation is identified and (b) cases in which a commercial funder is involved and where any costs liability is limited to their own investment in the action – the Arkin cap’ [Arkin v Borchard Lines Ltd and Others [2005] EWCA Civ 655].

Para. 70:

“I think the policy considerations which lie behind professional funding of litigation in Arkin explain why it is necessary to have a proportionality rule of the kind devised there. Thus, as Lord Phillips explained at [40], the rule was directed at cases where the funder left the claimant as the party primarily interested in the result of the litigation and as the party in control of the [sic] its conduct. That is to be contrasted with the type of case where the funder is the “real party” to the litigation and “not so much facilitating access to justice by the party funded as himself gaining access to justice for own purposes”: per Lord Brown in Dymocks at [23].”

What this judgment confirms for us is that ‘real parties’ to litigation will bear the full risk of adverse costs of litigation – as long as they have been put on notice of it or, if they weren’t, it would not have made any difference if they had.