A court will generally only make a non-party costs order against a controlling/funding director of a company if they were seeking to benefit personally from the litigation or were guilty of impropriety or bad faith, the Court of Appeal has ruled.
Lord Justice Coulson said, that “without being in any way prescriptive”, it would otherwise be very difficult to persuade the court that an order under section 51 of the Senior Courts Act 1981 was “just”.
In Goknur v Aytacli  EWCA Civ 1037, he upheld the decision last November of Matthew Gullick, sitting as a deputy High Court judge, not to make a non-party costs order against Cengiz Aytacli because he would not have benefitted from a successful outcome of the litigation he backed.
Giving the unanimous ruling of the Court of Appeal, Coulson LJ started by saying: “For those who believe that most civil litigation does not end up being about the costs that were incurred in pursuing that same litigation in the first place, look away now.”
The claim by the claimant company, Goknur, was struck out and it paid £185,300 on account of costs to Mr Aytacli’s company, Organic Village. But its counterclaim resulted in only nominal damages and the judge ruled that Goknur was the successful party, awarding it a quarter of its costs. Under a default costs certificate, Organic Village was ordered to pay £64,000.
Organic Village did not commence detailed assessment proceedings and had to pay back the £185,300. Mr Gullick said this was because it was unable to fund the instruction of Costs Lawyers, in circumstances where its solicitors had ceased to act shortly after the trial.
It was common ground that Organic Village did not have the means to do repay the money, having been balance sheet insolvent for several years and paid the money directly North London firm Hugh-Jones. Goknur then sought the non-party costs order for both sums – a total just shy of £250,000.
Mr Gullick accepted the claimant’s submission that Mr Aytacli controlled Organic Village and the conduct of the litigation, and that he had funded the litigation by means of a personal guarantee of Organic Village’s debts to Hugh-Jones and his agreement to enter a charge against his property in respect of some of that debt.
But Mr Gullick said the “type and level of funding provided” – in this situation, not actually paying for the solicitors – was relevant to the exercise of the discretion to make the order, as was the fact that the funding only started approximately halfway through what was a lengthy piece of litigation.
The judge went on to reject the submission that the litigation was being conducted by Mr Aytacli for his own benefit. Had substantial damages and costs been awarded, the beneficiary would have been Organic Village by reducing or extinguishing its indebtedness to its creditors.
“It would not be just to make a non-party costs order against Mr Aytacli in these the circumstances,” he said.
Also, had Organic Village been able to proceed with the detailed assessment, it was “highly probable” that the overall outcome of the costs proceedings would be a payment from Goknur. An application for a non-party costs order would have been “highly unlikely” to succeed in such circumstances, the judge said.
Coulson LJ said: “Without being in any way prescriptive, the reality in practice is that, in order to persuade a court to make a non-party costs order against a controlling/funding director, the applicant will usually need to establish either that the director was seeking to benefit personally from the company’s pursuit of or stance in the litigation or that he or she was guilty of impropriety or bad faith.
“Without one or the other in a case involving a director, it will be very difficult to persuade the court that a section 51 order is just.
“Mr Benson [for the appellant] identified no authority in which a section 51 order was made against the director of a company in the absence of either personal benefit or bad faith/impropriety.
“Conversely, there is no practice or principle that requires both individual benefit and bad faith/impropriety on the part of the director in order to justify a non-party costs order. Depending on the facts, as the authorities show, one or the other will often suffice.”
Applying these principles to the case, Coulson LJ said Mr Gullick was right to conclude that there was no individual benefit to Mr Aytacli in pursuing the litigation and that he did not act in bad faith.
“To pick out various elements of Mr Aytacli’s evidence which were not accepted by the trial judge, particularly when so much of it was, and weave out of those disparate elements a case of bad faith such as to justify a section 51 order, is a frankly hopeless task,” he observed.
Further, “the question of the bona fide nature of Mr Aytacli’s conduct” could be measured by reference to the merits of the litigation itself. He said Organic Village’s defence and counterclaim for breach of contract were “sound” and failed only on causation and foreseeability.
“Indeed, if there is a criticism of one side’s conduct to be made in this case, those criticisms are better directed at Goknur.”
Imran Benson (instructed by Hudson Morgan Williams) for the appellant. The respondent appeared in person.