Sparks that Burn: Personal Costs Orders Against Company Directors in the TCC

Introduction

It is perhaps a popular misconception among directors seeking sanctuary behind the corporate veil that the veil will protect them from any personal liability in the event that their company is sued (or sues). However, even the most bullet-proof of veils are not, it appears, impervious to the weaponry available to the courts in the form of section 51 of the Seniors Courts Act 1981. This is what the director of Hydropath realised, no doubt to his great dismay, when Akenhead J in the TCC slapped him with an order that he personally pay the costs of and occasioned by the counterclaims brought by his company.

Factual Background

Weatherford brought a claim for breach of contract against Hydropath in respect of electronic fluid conditioners for use in the oil and gas industry. Weatherford alleged the products breached warranties supplied because they created sparks in conditions of foreseeable misuse. Hydropath counterclaimed for breach of contract. Hydropath and the Third Party, Clearwell, lost on all the major issues.

The judge made orders that Hydropath and Clearwell should pay Weatherford’s costs in relation to its claim against Hydropath and, in relation to the counterclaim, the costs of both Weatherford and the fourth to sixth parties also involved. He ordered that interim payments on account of costs should be made in favour of Weatherford. Those sums were not paid. Weatherford applied to join a Dr Stefanini (director of Hydropath and Clearwell) as a party to the proceedings for the purposes of seeking a costs order against him personally. Permission was granted.

The Law

The Court has jurisdiction to make an order that the costs of any particular piece of litigation should be borne by someone who is not a party to that litigation:

"(1) Subject to the provisions of this or any other enactment and to rules of court, the costs of and incidental to all proceedings in—

… (b) the High Court…

shall be in the discretion of the court…

(3) The court shall have full power to determine by whom and to what extent the costs are to be paid" (section 51 of the Senior Courts Act 1981).

It was argued that costs orders made against non-parties are "exceptional". However, Akenhead J pointed to the Privy Council decision in Dymocks Franchise Systems (NSW) Pty Ltd v Todd [2004] UKPC 39, where Lord Brown stated at Paragraph 25 (1):

"Although costs orders against non-parties are to be regarded as "exceptional", exceptional in this context means no more than outside the ordinary run of cases where parties pursue or defend claims for their own benefit and at their own expense. The ultimate question in any such "exceptional" case is whether in all the circumstances it is just to make the order. It must be recognised that this is inevitably to some extent a fact-specific jurisdiction and that there will often be a number of different considerations in play, some militating in favour of an order, some against."

The learned judge stated this dictum contained the “overriding requirement” that discretion is to be exercised only against a non-party if, when and to the extent that it is just to do so.

Akenhead J stated that it was clear that the categories of case in which such an order could be are neither rigid nor closed and are very much fact sensitive. He referred to Balcombe LJ’s judgement in Symphony Group Plc v Hodgson [1994] QB 179 which included the following categories:

• Where a person has some management of the action, e.g. a director of an insolvent company, who causes the company improperly to prosecute or defend proceedings;
• Where a person has maintained or financed the action;
• Where the person has caused the action.

Akenhead J further referred to Blacombe LJ’s “material considerations” to be taken into account when considering whether to make such a costs order, as follows:

• An order for the payment of costs by a non-party will always be exceptional;
• It will be more exceptional for an order for the payment of costs to be made against a non-party, where the applicant has a cause of action against the non-party and could have joined him as a party to the original proceedings;
• Even if the applicant can provide a good reason for not joining the non-party against whom he has a valid cause of action, he should warn the non-party at the earliest opportunity of the possibility that he may seek to apply for costs against him;
• An application for payment of costs by a non-party should normally be determined by the trial judge;
• The procedure for the determination of costs is a summary procedure, not necessarily subject to all the rules that would apply in an action.

Akenhead J set out further guidance gleaned from his review of the relevant authorities, summarised as follows:

• Generally, the discretion to order personal costs 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 in no way seek to control its course;
• where, however, the non-party not merely funds the proceedings but substantially controls or benefit from them, justice will ordinarily require that, if the proceedings fail, he will pay the successful party's costs;
• where a person is a major shareholder and dominant director in a company which brings proceedings, that alone will not justify a third party costs order. Something additional is normally warranted as a matter of discretion. The critical element is often a fresh injection of capital for the known purpose of funding litigation;
• It was appropriate to recognise a general category of case encompassing the case of a receiver of a company who is not a party to the litigation. This category of case consists of circumstances where the party to the litigation is an insolvent person or ‘man of straw’, where the non-party has played an active part in the conduct of the litigation, and where the non-party has an interest in the subject of the litigation. When this category applies, an order for costs should be made against the non-party if it is in the interests of justice;
• It is insufficient to render a director liable on the basis that he was a director and caused the company to bring/defend proceedings which he funded but failed. Where proceedings are brought bona fide and for the benefit of the company, the company is the real party;
• The principle of corporate limited liability could be outflanked if the director against whom a non-party costs order was sought was guilty of some bad faith or impropriety;
• The "pursuit of speculative litigation" may in itself support in making of a costs order against a non-party;
• A non-party costs order should not be made where the relevant costs would have been incurred anyway without the involvement of the non-party.

However, it was made clear that these principles were guidance, not rules, and that the ultimate question was whether it is just in the circumstances to make the order.

Although funding took place in most of the reported cases, it was considered not essential or a jurisdictional pre-requisite to the exercise of the court's discretion. If the evidence was that a respondent had effectively controlled the proceedings and sought to derive potential benefit from them, that would be enough to establish the jurisdiction. Whether such jurisdiction should be exercised was another matter entirely and the extent to which a respondent had, in fact, funded any proceedings may be very relevant to the exercise of discretion.

Application to the facts

In forming the “very clear view” that it was just and fair to order that Dr Stefanini personally paid the costs of and occasioned by the counterclaims, Akenhead J took the following factors into account:

• Dr Stefanini was at all material times the major shareholder both in Hydropath and in Clearwell;
• He had throughout exercised full control of both companies. All decisions on all matters relating to the litigation were taken by him;
• Primarily he stood to benefit from the litigation e.g. if Hydropath had succeeded in its counterclaim against Weatherford, there could have been substantial damages from that, translating through the company accounts into dividends payable to him;
• He had been shown to have funded approximately at least half of the costs of the litigation. Without that funding, Hydropath was otherwise insolvent; it was accepted that Clearwell was during all or most of the litigation effectively insolvent save for the fact that it was being supported by Hydropath;
• The counterclaims were speculative in that they were put forward without any real analysis as to whether there was in reality any prospect of success. The decision for pursuing those counterclaims was substantially and substantively that of Dr Stefanini. Whilst it was not unreasonable on legal and commercial grounds to contest the proceedings, it was unreasonable to mount the speculative counterclaims;
• Dr Stefanini’s conviction that he was always right and everyone else was wrong when it came to the case, meant that the learned judge concluded that it was positively unlikely that, even if he had been warned in advance that a costs order would be sought against him personally, he would have done anything different from what he did which was to continue to defend the claim and to pursue through to judgment the counterclaims.

Conclusion

Company directors do not need to be feeling unduly anxious following this decision. The TCC has made it clear that the use of its discretion under section 51 of the Senior Courts Act 1981 will only be exercised in exceptional circumstances. It is submitted that the director in the context of this claim was ‘burnt’ because, in addition to defending the claim, he brought a counterclaim which the judge considered to be speculative.

Directors should perhaps resist the temptation to ‘strike back’ at claimants looking to bring proceedings against their company, if it would appear that the most appropriate course of action is merely to defend the action in question rather than also launch a counterclaim.

Directors should take heed of the advice of their legal representatives as to the merits of any potential counterclaim before seeking to press ahead, if the only utility in bringing the counterclaim is as a device to provide pressure e.g. to settle, the matter may well end up at trial. And the director may end up with the bill.

The judgment can be found here.