Kerry Underwood

NON-PARTY COSTS ORDER AGAINST FAMILY MEMBERS: A VERY STRANGE DECISION

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The matters dealt with in this piece are examined in great detail in my three volume, 1,300 page book Personal Injury Small Claims, Portals and Fixed Costs – price £50 and available from Underwoods Solicitors here.

Kerry Underwood offers consultancy services in relation to this and other matters and details are here.

In

Kazakhstan Kagazy Plc & Ors v Zhunus & Ors [2019] EWHC 2630 (Comm) (08 October 2019)

the Commercial Court, part of the High Court, made non-party costs orders under section 51 of the Senior Courts Act 1981 against the wife and mother-in-law of the second defendant where they had funded that defendant’s unsuccessful defence of a very substantial fraud claim.

The relatives argued that non-party costs orders were not normally made against close family members who have provided funding and that there were no special circumstances here justifying a different result.

They were pure funders and as such had no personal financial interest in the litigation, did not stand to benefit from it, were not funding it as a business interest and did not seek to control the conduct of the litigation.

The court disagreed and stated that there were no firm rules as to how funding by family members was to be regarded for the purposes of section 1 and that each case was dependent upon the facts.

The wife’s funding began after she received US$181 million from a trust in which the defendant had an interest and this meant that the defendant looked to his wife, rather than the trustees, for the money to fund his defence.

It was relevant that the defendant and his funding wife had an extravagant lifestyle as the money paid to the defendant’s solicitors was to defeat very substantial claims which threatened that lifestyle.

Consequently, the wife was not a pure funder, but rather stood to benefit from the successful defence of the litigation.

The wife had transferred US$97.5 million to her mother, that is the defendant’s mother-in-law, as part of an asset dissipation exercise, but retained control of those funds.

Although the mother-in-law had not caused the claimant to incur extra costs, her conduct had impeded the successful claimant’s ability to recover its costs, and in those circumstances, justice required orders to be made against both the wife and the mother-in-law.

The court here quoted from

 

Travelers Insurance Company Ltd v XYZ [2018] EWCA Civ 1099 :

 

“On an application of this kind the court is not concerned with legal rights and obligations but with a broad discretion which it will seek to exercise in a manner that will do justice. The only immutable principle is that the discretion must be exercised justly… It also follows that previous cases in which judges have or have not exercised their discretion in different ways cannot be regarded as laying down prescriptive rules”.

 

22 days after the decision here, the Supreme Court unanimously reversed the decision of the Court of Appeal in the Travelers case –

Travelers Insurance Company Ltd v XYZ [2019] UKSC 48 (30 October 2019)

However, that case concerned the liability of insurers of a party and is only relevant in so far as it shows an approach less favourable to the making of section 51 orders against non-parties.

In

Deutsche Bank A.G. v Sebastian Holdings Inc & Anor [2016] EWCA Civ 23 (21 January 2016)

the Court of Appeal said:

“It should also be recognised that, since the decision involves an exercise of discretion, limited assistance is likely to be gained from the citation of other decisions at first instance in which judges have or have not granted an order of this kind”.

Following these decisions, the court here effectively held that the old rule that family members should not be regarded as pure funders no longer applied:

“In my view, however, these older authorities cannot (in the light of Sebastian and Travelers) be regarded as laying down any firm rule as to how funding provided by a family member is to be regarded in the context of an application under s.51”.

The court then reviewed the general principles of law and the facts of this case without being bound by the old principle; in other words, the same principles apply to family funders as anyone else.

Here the court also took the view that the Arkin cap – named after the case

Arkin v Borchard Lines Ltd & Ors [2005] EWCA Civ 655 (26 May 2005)

was of no real relevance to this case as it only applied to professional funders and that even in the case of professional funders the Arkin cap is not an inflexible rule and the court quoted from

 

Davey v Money [2019] EWHC 997 (Ch)

 

“[W]hat has become known as the Arkin cap is, in my judgment, best understood as an approach which the Court of Appeal in Arkin intended should be considered for application in cases involving a commercial funder as a means of achieving a just result in all the circumstances of the particular case. But I do not think that it is a rule to be applied automatically in all cases involving commercial funders, whatever the facts, and however unjust the result of doing so might be”.

 

Comment

It is hard to imagine a case in which a spouse will not have a financial interest in her or his spouse’s litigation and it is hard to see why the facts of this case are sufficiently exceptional to justify departure from the usual rule that family members will not be subject to non-party costs orders.

The risk in this decision is that family members will be unprepared to support their relatives in dealing with the costs of litigation.

The decision also turns the Arkin cap on its head, holding that non-commercial funders do not enjoy its benefit, thus exposing family members to a risk of a greater financial penalty than commercial funders who are investing in a case for profit!

The decision also suggests that funding a defence, as this was, of itself was somehow unreasonable, as compared with the usual test of the funder causing unreasonable or unnecessary costs to be incurred.

Part of the defence of the application was that the defendant, if unfunded by his relatives, would have carried on as a litigant in person, and thus the funding did not cause the claimant to incur any extra costs.

The court had this to say: 

“There was in fact no evidence that Mr. Arip ever contemplated fighting the case as a litigant in person, or that he would have done so – rather than allowing the proceedings go undefended (sic)…” (Paragraph 103).

Thus, the court appears to be saying that a defendant who has run out of money should just give in and not defend the case.

In an ironic twist, the claimants were funded by professional, commercial funders.

Surprisingly, and unusually, this section 51 application was heard by a judge who had not heard the substantive case.

This is a poor decision which is likely to be distinguished by any other court.

Written by kerryunderwood

November 1, 2019 at 9:20 am

Posted in Uncategorized

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