England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE BRISTOL COUNTY COURT
(TRANSFERRED FROM EXETER COUNTY COURT)
HIS HONOUR JUDGE HAVELOCK-ALLAN QC
EX 190058

		Royal Courts of Justice Strand, London, WC2A 2LL
		14/11/2007

Lord Justice Rix :

1. This appeal is about the payment of costs by a non-party, pursuant to section 51(3) of the Supreme Court Act, 1981.^[1] In Aiden Shipping Co Ltd v. Interbulk Ltd (The Vimeira) [1986] AC 965, the House of Lords held that this provision gave such power to the courts to order a non-party to pay costs. Lord Goff of Chieveley said (at 981A/B):

"Courts of first instance are, I believe, well capable of exercising their discretion under the statute in accordance with reason and justice…If any problem arises, the Court of Appeal can lay down principles for the guidance of judges of first instance…"

2. Twenty years later the jurisdiction is well recognised, and has been applied in a variety of situations. As Lord Goff foresaw, the court of appeal has given guidance as to general principles. There are a number of well-known decisions in which these principles have been worked out, such as Symphony Group plc v. Hodgson [1994] QB 179, Murphy v. Young & Co's Brewery plc [1997] 1 WLR 1591, Hamilton v. Al Fayed (No 2) [2002] EWCA Civ 665, [2003] QB 1175, and Arkin v. Borchard Lines Ltd [2005] EWCA Civ 655, [2005] 1 WLR 3055. Of particular importance is a recent decision of the Privy Council, Dymocks Franchise Systems (NSW) Pty Ltd v. Todd [2004] UKPC 39, [2004] 1 WLR 2807. The principles laid down in these authorities are not in dispute, and it is not suggested in this appeal that the judge got the law wrong. It is now well-established that one of the principal questions for the court is whether the non-party (who renders himself liable to the regime, whether by funding or controlling the litigation or even in some other way) is the "real party" to the litigation: see Dymocks at para 25.
3. One particular situation which has given the courts a little trouble is that of the non-party in a corporate setting who is inevitably close to a company litigant, such as a director, controlling shareholder or liquidator. Such persons are almost as a matter of course in charge of the company's litigation, and, where the company is insolvent or practically so, may be funders too: are they therefore liable under the section 51(3) regime? This problem has itself been discussed in a number of cases, such as Taylor v. Pace Developments Ltd [1991] BCC 406, Metalloy Supplies Ltd v. MA (UK) Ltd [1997] 1 WLR 1613, In re North West Holdings plc [2001] 1 BCLC 468 and Goodwood Recoveries Ltd v. Breen [2006] EWCA Civ 414, [2006] 1 WLR 2723 (all decisions in this court). The concern in such cases is to avoid trespassing illegitimately on the concept of the separate liability of the company. This is the area in which the present appeal lies.
4. In Metalloy at 1620, Millett LJ put the problem in this way:

"Such an order is, however, exceptional, since it is rarely appropriate. It may be made in a wide variety of circumstances where the third party is the real party interested in the outcome of the suit…It is not, however, sufficient to render a director liable for costs that he was a director of the company and caused it to bring or defend proceedings which he funded and which ultimately failed. Where such proceedings are brought bona fide and for the benefit of the company, the company is the real plaintiff. If in such a case an order for costs could be made against a director in the absence of some impropriety or bad faith on his part, the doctrine of separate liability would be eroded and the principle that such orders should be exceptional would be nullified. The position of a liquidator is a fortiori."

5. Millett LJ there was prophetic in identifying the test of the "real party" as central, as the Privy Council in Dymocks was to establish. He also put forward "some impropriety or bad faith" as a possible alternative basis of liability, but not as essential to it (see Goodwood at paras 59 and 70).
6. Dymocks was not itself concerned with the case of a director or other internal agent or officer of a company: but Lord Brown of Eaton-under-Heywood summed up the position in these terms:

"29. In the light of these authorities their Lordships would hold that, generally speaking, where a non-party promotes and funds proceedings by an insolvent company solely or substantially for his own financial benefit, he should be liable for the costs if his claim or defence fails. As explained in the cases, however, that is not to say that orders will invariably be made in such cases, particularly, say, where the non-party is himself a director or liquidator who can realistically be regarded as acting rather in the interests of the company (and more especially its shareholders and creditors) than in his own interests."

7. However, a section 51(3) order is ultimately dependent upon an exercise of discretion. As Lord Justice Longmore said in Petromec Inc v. Petroleo Brasileiro SA Petrobras [2006] EWCA Civ 1038 [2007] Costs LR 212 at para 10:

"If the evidence is that a respondent (whether a director or shareholder or controller of a relevant company) has effectively controlled the proceedings and has sought to derive potential benefit from them, that will be enough to establish the jurisdiction. Whether such jurisdiction should be exercised is, of course another matter entirely and the extent to which a respondent has, in fact, funded any proceedings may be very relevant to the exercise of discretion."

8. In that case Longmore LJ also deplored the danger that the exercise of the jurisdiction becomes over-complicated by reference to authority (at para 11). Lord Justice Laws spoke in similar terms. He said that while the learning is important as indicating the kind of considerations upon which the court will focus, it must not be treated as a rule-book (at para 19). And in Alan Phillips Associated Ltd v. Dowling [2007] EWCA Civ 64, [2007] 1 BLR 151 Lord Justice Chadwick referred to the dicta in Petromec v. Petrobras and added (at para 21):

"He [Longmore LJ] observed that, essentially, the decision whether or not to make a third party costs order under section 51 of the Supreme Court Act 1981 lay in the discretion of the judge – who ought usually to be the trial judge as the judge having the best knowledge…and that the appellate court should be cautious before intervening to reverse that exercise of discretion."

9. Lord Justice Moses said (at para 31):

"…this court should not interfere with the judgment of a judge as to the propriety of such an order unless the judge plainly erred."

10. In the present case, the judge, HHJ Havelock-Allan QC, made a section 51(3) order against Mr and Mrs Hawkins, respectively the sole director and company secretary, and shareholders, of the company in question, but only from a certain point of time in this litigation, viz 1 October 2005. It is not Mr and Mrs Hawkins who appeal against that order, but the claimant in whose favour the order was made, Mr Sims: because he complains that the order should have been made so as to apply right from the outset of the dispute, from the time a letter before action was sent on 27 November 2000, or at any rate from some later date, such as when the company concerned ceased to trade on 31 May 2002. However, the judge found that it was only from 1 October 2005, a few months before trial, that the personal motives of Mr and Mrs Hawkins, rather than the interests of the company, began to make it just to conclude that they should be made liable for the company's costs, on the basis that from that time they were acting substantially for their own benefit.
11. The appellant, Mr Sims, accepts that the judge directed himself correctly on the law, and he also accepts the judge's findings of fact – although as will appear below the latter concession is not quite complete. He accepts that the jurisdiction is fact-sensitive. He submits, however, that the judge applied the law to the facts incorrectly, and thereby erred in his discretion; and, in particular, he submits that he applied his own findings inconsistently at a crucial point of his judgment. The respondents, Mr and Mrs Hawkins, submit that the judge's judgment is coherent, and, as an exercise in discretion, unassailable.
12. It is necessary now to set out the facts in greater detail.

The facts

13. The claimant and here the appellant, Mr Dean Sims, bought the last remaining unit of a property development, unit 2, on 31 March 2000, for £185,000, from the developer, a company then called Roger Hawkins Design and Construct Ltd (the "company"). That purchase led to this litigation, which commenced on 25 October 2001, in which Mr Sims sued the company for breach of contract and/or misrepresentation and/or breach of the Defective Premises Act 1972. In all there were twelve units at the development, which was at Higher Compton Barton, near Paignton in Devon. There had been a flood at the development in October and again in December 1999: Mr Sims had known about the floods when he bought unit 2, but his complaint was that he did not know as much about the inadequacy of the development's drainage system as he should have done. Remedial works had been put in hand by the company, but it was said that they were inadequate.
14. On 27 November 2000, Mr Sims' solicitors, Cresswell & Co, wrote a letter before action to the company. He and the other residents of the development had retained the services of a surveyor, Mr Rodney Broom, on the basis of whose report it was estimated that the costs of relieving the prospect of flooding in the case of unit 2 was £17,500, and for the development as a whole, £30,000, plus professional fees. There were the costs mentioned in the letter. However, Mr Broom also estimated that the costs of remedial work on the development as a whole should be over £120,000 plus VAT plus fees. A particular concern expressed in the letter was that Mr Sims could not obtain storm and flood insurance cover and that the home was therefore unmarketable.
15. This letter caused Mrs Eileen Hawkins, the wife of Mr Roger Hawkins, the sole director of the company, to consult the company's solicitors. (Mrs Hawkins was the company secretary, but she accepted she was a de facto director, and the judge treated both husband and wife as the company's directors. They were also its shareholders.) In a letter to Mrs Hawkins dated 7 December 2000, those solicitors advised the company about the possible consequences of closing down the company in the face of impending litigation. At that time it was thought that the company had applicable insurance, but that turned out not to be the case. It is not clear from the letter exactly what advice was tendered, in part because on one view there is a missing "not" in the text. However, the letter stated that there was a good argument that there was no responsibility for flooding.
16. On 6 August 2001, having been sent draft particulars of claim by Cresswell & Co, the company's solicitors made an offer, without prejudice save as to costs, of £5,000, for the benefit of the residents at the development as a whole. On 11 September 2001 Cresswell & Co proposed mediation but the offer was rejected by the company.
17. Mr Sims commenced these proceedings on 28 October 2001. The other residents did not issue proceedings. Mr Sims' original claim was for £55,000 to reflect diminution in the value of the property at the time of its purchase. The claim form stated that the value of the claim was "In excess of £70,000 including cost of remedial works and associated professional advisory fees".
18. On 16 January 2002, the company's solicitors wrote to Cresswell & Co, expressing confidence in defending the claim, even striking it out. The letter pointed out that the company was not insured, had limited funds and no realisable assets, and that the prospect was of the company being struck off "having served its purposes". The letter repeated the offer previously made.
19. The company's accounts for the year ending 31 May 2002 recorded that it ceased to trade on that day. Net assets (mainly in the form of debtors) were stated at £22,109. The judge's judgment provides the following details of the company's history. It was acquired to promote the development at Higher Compton Barnet. It later embarked on several other projects. A property in Paignton was acquired in February 2000 and another in Totnes in March 2000, with funds provided by Mr and Mrs Hawkins. They were not developed owing to planning difficulties and were transferred, in April 2002 and August 2001 respectively, to a related company in the ownership of Mr and Mrs Hawkins called Mintwood Limited. The transfers were for the same or more than the original cost. Two further properties, one in Denbury and the other known as Pound House, were acquired in May and June 2000 respectively, and successfully developed and sold, in November and May 2001 respectively. The proceeds of all four transactions were used by the company to repay bank borrowings and Mr and Mrs Hawkins' loans.
20. On 23 September 2002 Mr Sims proposed a settlement on payment of £37,600 inclusive of interest, plus costs. That was not accepted.
21. In December 2002 Mr Sims sold unit 2 for £280,000, a profit of £95,000. It was bought by near neighbours, the owners of unit 12. Completion was on 3 January 2003. Mr Sims thereupon reformulated his claim: his primary measure of damage claimed was now the diminution in value of the property at the time of its resale by reason of the risk of flooding, put at 12.5% to 15% or £37,700 to £41,600. The original claim in the sum of £55,000 relating to the time of purchase was deleted.
22. Following the sale, Cresswell & Co wrote, without prejudice, to offer to settle the claim by letter dated 28 December 2002. Mr Sims' offer was premised on valuations which he had obtained to suggest that his sale price was at least £25,000 less than the achievable market price (in the absence of the flood risk): he proposed to accept a sum of £17,500 plus an additional sum of £7,500 towards legal costs. The response was a proposal of a drop hands settlement, with both parties bearing their own costs.
23. Also in December 2002, there was a case management conference in which the case was allocated to the multi-track and directions were given inter alia for the exchange of hydro-drainage expert evidence. The judge commented that it was at about this point that the pattern of conduct in the litigation changed. It dawned on the company that Mr Sims was not going to go away and that the company had to take the claim seriously. Previously it had acted as if it hoped that a minimal response would persuade Mr Sims to go away. As for Mr Sims, the judge had given this description in his judgment on liability dated 27 July 2006:

"33…His anger rather got the better of him and he vowed to pursue Mr Hawkins to the bitter end and to make him pay. But by the time of the trial (which was much delayed by two adjournments) much of the fire had gone out of him. He had sold Unit 2 and had moved on. The episode was fast becoming history. The claimant showed only occasional glimpses of the old antagonism…"

24. On 30 October 2003, Judge Overend strongly recommended that the parties proceed to mediation under the Exeter County Court Mediation Scheme. Mediation took place in June 2004, delayed by a desire to have an exchange of final reports in hand before then. As it was, Mr Broom's report and calculations (for Mr Sims) were incomplete, which was one reason why the mediation was unsuccessful. The other reason, as the judge recorded, was that Mr Sims only wanted a commercial deal and did not want to discuss the hydro-drainage issues. The mediation lasted barely an hour.
25. The judge was asked in the end to disallow Mr Broom's costs altogether, on the basis that there were serious reservations about his figures and the manner in which they were advanced. The judge agreed, but did not go as far as he was asked to go, and he allowed only two-thirds of those costs.
26. Following the failed mediation, the company repeated its offer of a drop hands settlement, with each side bearing its own costs. On 22 April 2005, the company, then unrepresented (being without professional representation between November 2004 and November 2005), repeated that offer. Its letter referred to the single joint valuation expert, Mr Woodhead FRICS, whose report dated 18 April 2005 concluded that there had been no loss on the sale of unit 2 in December 2002, since Mr Sims had obtained the fair unblighted market price for it at that time. The report also observed that, at the time of Mr Sims' purchase, the maximum discount that the parties would have agreed to take account of the full facts surrounding the flooding would have been £15,000.
27. That was the last offer between the parties prior to trial. A trial date had been fixed for June 2005, but unfortunately had to be vacated owing to the illness of the judge. It was refixed for 17 October 2005. There followed an attempt by Mr Sims to strike out the defence unless a costs order for £1,310.49 was paid by the company. There was a hearing before District Judge Crosse on 16 September 2005 attended by Mr Sims and Mr Hawkins in person. The district judge refused Mr Sims' application. Mr Sims appealed. There was a telephone hearing on 14 October 2005 before Judge Havelock-Allan, who allowed the appeal, made an "unless order" for payment of the costs, and adjourned the trial date to 12 December because of the appeal. On 13 October, Mr Hawkins had submitted a skeleton argument to the judge to resist the appeal. In it he asked the judge not to derail the proceedings by granting the appeal. He submitted:

"Despite the fact over 2 years has elapsed since the last cost order was made no serious efforts have been made to obtain payment until a few days before trial. The percentage owed is a small amount relative to Mr Sims' own estimated costs to trial of £130,000. The Defendant asks His Honour to consider costs in the Defendant's favour should the Claimant decide to withdraw as the Claimant has been aware of the lack of funds in the Defendant Company since 2002 and has refused offers to "walk away". The Claimant against better sense has continued to pursue the claim and the Defendant requests a Trial and the opportunity to recover the heavy costs involved."

28. Subsequently, the judge was to cite and rely on this submission in his judgment about the section 51(3) order. He said:

"41…It is apparent from this passage that Mr and Mrs Hawkins were anxious to proceed to trial in order to recover their substantial investment in funding the costs of the company's defence. Whatever their initial motive for supporting the company, there came a point when they were intent on continuing the trial in order to get their money back. From that point, I think it is right to conclude that the continued funding of the defence was in their own interests rather than the interests of the company."

29. Having lost the appeal on 14 October 2005, Mr and Mrs Hawkins caused the relevant costs to be paid to Cresswell & Co on 27 October, via one of their companies, Miplace Limited.
30. The trial began on 12 December 2005 and continued for four days, and a further 2 days in February 2006. The trial should have completed the litigation (subject to any appeal), but unfortunately Mr Woodhead, the single joint valuation expert, fell ill and was unable to give evidence. It was agreed that the judge could not conclude the question of quantum, if that arose, without Mr Woodhead's report being subject to cross-examination, and that in the circumstances the judge should deal with quantum by answering only two questions of principle (at para 81 of the first judgment, dated 27 July 2006): "(1) Should damages be assessed at the date of purchase or sale? (2) Should sale proceeds be brought into account in reducing or extinguishing any loss if valued at date of purchase?" The judge, having found, in a lengthy and careful judgment, that there was liability, went on to answer both quantum questions in the affirmative. This was despite the fact that the claim had been pleaded on the base of loss of market value on resale. He therefore concluded, on the basis of Mr Woodhead's report, that:

"It follows that I consider that the sale in January 2003 is potentially relevant in assessing the claimant's loss and that, if Mr Woodhead's opinion survives cross-examination, the loss to the claimant is no more than £10,000."

31. I am not sure why the judge said "potentially" relevant, having answered the second question in the affirmative. Be that as it may, the reason why the judge gave £10,000 as a possible maximum, is that Mr Woodhead, while sticking with his opinion that the sale at £280,000 was at full unblighted market value, had been prepared to accept a margin of error, to the extent of £10,000.
32. In these circumstances, the judge gave judgment in favour of Mr Sims for damages to be assessed and reserved argument about costs. On 10 August 2006, in the absence of any representation on behalf of the company, he ordered that the question of costs should be reserved until after judgment on the assessment of damages. Moreover, upon the undertaking given on behalf of Mr Sims to issue a section 51 application for a third party costs order against Mr and Mrs Hawkins, he gave directions inter alia for adding them as parties for the purposes of costs only and for disclosure by them on the issue of their potential personal liability. It emerges from the section 51 judgment presently under appeal that Mr and Mrs Hawkins were first placed on notice that Mr Sims intended to seek a costs order against them during the December 2005 trial.
33. Whether or not the judge entertained hopes that the question of damages might be agreed, the fact is that that issue as of itself had by now become vastly outweighed by the issue of costs. If the judge had decided that Mr Woodhead's opinion should be upheld in full, the damages would have been merely nominal. In such a case, there might have been serious argument that costs might even have been awarded in favour of the company. As it is, after a further two day hearing in November 2006, the judge on 12 December 2006 gave a further reserved judgment, the one under appeal here, dealing with three subjects: (i) the assessment of damages; (ii) costs as against the company; (iii) costs as against Mr and Mrs Hawkins.
34. The judge decided these matters as follows. On (i), the issue of damages, he awarded Mr Sims £15,000. Although accepting Mr Woodhead's report and essential conclusion that there was no loss once the sale price had been taken into account, he arrived first at £10,000 damages by virtue of Mr Woodhead's acceptance that there was a margin of error and that Mr Woodhead felt "comfortable" with a figure for the unblighted market value of unit 2 at the time of sale at £290,000: the judge viewed that as an acceptance of a mean; and secondly, he reached £15,000, by concluding that there was "scope" for finding that the unblighted value could be put as high as £295,000. In that way, he elided the damages which he would have awarded based on the lower value at the time of purchase, and the cost of remedial works, with the figure, which was that actually claimed, based on the loss at the time of sale. He said, however, that he had "erred on the generous side in arriving at the figure of £15,000". As for (ii) costs against the company, he crafted careful orders to take account of various factors, including the offers that had been made. He made his order for costs against the company on an indemnity basis down to 1 March 2003: this was because he considered that (a) Mr Sims' offer to settle for £17,500 made on 23 December 2002 should be regarded as being inclusive of interest and therefore just beat the judgment result; and (b) because the company's conduct of the litigation up to March 2003 had not been serious (although thereafter it had become so).
35. As for (iii), the personal liability of Mr and Mrs Hawkins, he found that they had funded the company's defence "at the trial" substantially for their own benefit, in order to recover the costs which they had previously committed, by funding the company either directly or indirectly (through other companies). He therefore considered that their liability should start from 1 October 2005, in the run-up to trial, but not before. In this connection he bore in mind Mr Hawkins' own submission dated 13 October 2005 cited above. He supported this conclusion, but "only as a factor", by the consideration that Mr and Mrs Hawkins had not been put on notice that Mr Sims would look to them for his costs until the trial in December 2005. He found that in these circumstances they ought to have realised that they were at risk of a non-party costs order "some time before trial", but that they may not have appreciated the risk at an earlier time.

The judgment below

36. Mr Sims' application for a costs order against Mr and Mrs Hawkins proceeded on a wide basis, including a complaint that they had dishonestly stripped the company of assets and in that context were guilty of conducting the company's defence in bad faith. On that ground, Mr Sims sought that they should pay the costs throughout, starting from the letter before action in November 2000. However, quite apart from his separate reasons for finding that 1 October 2005 was the critical moment from which they should bear costs, the judge rejected the allegations of dishonesty and bad faith.
37. Thus he considered and rejected submissions that Mr and Mrs Hawkins had stripped the company of its assets by transactions outside the usual course of business. At all material times the company was of little net worth: that was the way in which the company was run, and it was natural that sale or development proceeds should be used, first and foremost, to repay borrowings, and, in so far as there was a profit, to pay shareholders a dividend (paras 32/33). While Mr and Mrs Hawkins were conscious to see that the company would not be worth powder and shot, and chose to carry out further developments in other companies, leaving the company dormant, he accepted that "No claimant suing a company is entitled to assume that the company will organise its affairs so as to be able to satisfy a judgment and order for costs" (at para 35). When the company ceased to trade, in the early stages it "probably could have satisfied a judgment for £15,000 and the comparatively modest costs which the claimant would then have occurred", albeit over time the position changed. Moreover, he acknowledged that this case was a far cry from one where directors have launched a speculative claim, and he accepted that the company had a bona fide, indeed a "good arguable" defence. In the circumstances, the judge stressed, as the submissions made to him on behalf of Mr Sims had done, that the absence of any impropriety did not exclude the power to make a section 51 order (see paras 28 and 36).
38. It was not disputed that Mr and Mrs Hawkins had controlled and, as time went on, funded the litigation. As for the funding, the judge found that the company itself had about £22,000 as at 31 May 2002, and that thereafter its funds shrank to about £4,000 at the end of May 2003 (the figure in the company's accounts as at that latter time). These funds were accepted as being spent on defending the claim. Even before May 2003, however, the company needed assistance and received several small injections of cash. The judge made no findings as to the extent of the funding.^[2]
39. The critical part of the judge's reasoning consisted in considering against that background the essential question, posed by Dymocks, of who was the real defendant: in whose interests and for whose benefit had the litigation been defended? In the light of the submissions which have been addressed, it is necessary to set out the whole of the relevant passage of the judge's judgment:

"37…Were Mr and Mrs Hawkins acting in the interests of the company rather than in their own interests in keeping the company alive and funding the costs of the defence?

38. I can think of only two reasons why maintaining and funding the defence might have been thought to be in the company's interests. The first was the vindication of the company's reputation by obtaining positive findings that the risk of flooding was not misrepresented to the claimant and that the remedial works were adequate. The second was to preserve the existence of the company and to prevent it being forced into liquidation by the enforcing of the judgment.

39. In her statement Mrs Hawkins puts forward the first of these reasons, rather than the second. I am not persuaded. Her evidence on this score has a hollow ring. Mr and Mrs Hawkins were prepared from the outset to countenance the demise of the company. That was not the attitude of people anxious to fight for principle. Furthermore the reputation of the company was inextricably bound up with the name of Roger Hawkins. It was as much the reputation of Mr Hawkins which was at stake if the claimant won the action as that of Roger Hawkins Design and Construct Limited. The change of company name in July 2004 to Abendigo Property Limited must have been largely if not exclusively intended to divorce, in the public mind, the connection between Mr Hawkins and the company. I am therefore unable to accept that the motive or primary motive for funding the defence was a desire to vindicate the reputation of the company.

40. As for the second reason, the change of name might suggest that Mr and Mrs Hawkins had plans to use the company for further projects after the litigation was over: but there was no evidence to that effect. Mr and Mrs Hawkins have not put forward this explanation as the justification for keeping the company alive (but dormant) and funding the defence out of their own pocket. In any case I question whether that strategy would justify as one in the interests of the company rather than in the interests of the directors.

41. Another reason why Mr and Mrs Hawkins may have chosen to fund the defence is revealed by the written submissions which Mr Hawkins filed in opposition to the claimant's appeal in October 2005^[3]…It is apparent from this passage that Mr and Mrs Hawkins were anxious to proceed to trial in order to recover their substantial investment in funding the costs of the company's defence. Whatever their initial motive for supporting the company, there came a point when they were intent on continuing the trial in order to get their money back. From that point, I think it is right to conclude that the continued funding of the defence was in their own interests rather than the interests of the company.

42. The difficult question is in fixing the point at which it can be said that personal motives rather than the interests of the company began to fuel Mr and Mrs Hawkins' determination to see the litigation through. The burden rests on the claimant to prove the element of personal interest which is essential for the making of a non-party costs order. I am not persuaded that it existed from the outset of the action. The inquiry begins once the company ceased trading and Mr and Mrs Hawkins began funding the defence. That was after June 2002. But even where the directors provide funding for a claim or for a defence, a non-party costs order will not invariably be made (see paragraph 37 above^[4]). An element of own benefit must be identified. In the present case it is not easy to identify what that element was, until the level of costs grew to the point where Mr and Mrs Hawkins had such a financial stake in the action that they became intent on going to trial in order to get it back.

43. In the end I find assistance in determining this issue in the fourth and last of the defendants' submissions. This was to draw attention to the statements in the authorities (see eg Ward LJ in Wiggins v. Richard Read (Transport) Limited unrep. 8/12/98) that delay in placing the non-party on notice of the risk of a non-party costs order is a material factor in the exercise of the discretion and in some case may be fatal. It is only a factor. There is no rule that an order will only be made in respects of costs incurred after the date at which the non-party was warned that his conduct might expose him to a liability for costs. But a Court will be slow to award costs against a non-party in respect of his support of a claim or a defence at a time when he could not reasonably have been expected to appreciate that such support might expose him to a costs liability. In the present case Mr and Mrs Hawkins were only placed on notice at the trial of liability in December 2005 that the claimant intended to seek a costs order against them. I am satisfied that they ought to have realised that they were at risk of a non-party costs order some time before trial although they may not have appreciated the risk as early as March/April 2003 when the claimant's solicitors began probing the company's disposals of property to Mintwood.

44. The conclusion I have reached is that Mr and Mrs Hawkins funded the defence of the company at the trial substantially for their own benefit and that they should be liable, jointly and severally with the first defendant, for the claimant's costs of the action after 1^st October 2005. It follows that they must pay the claimant's costs of the section 51 issue."

The submissions on behalf of Mr Sims

40. Mr Sims has appealed against this order, seeking the whole costs of the claim from the time of his letter before action. His primary and overarching submission, spelled out at length in the skeleton argument of Mr Andrew Parsons, who represented him at trial and on this appeal, is that Mr and Mrs Hawkins had been dishonest, stripping their company illegitimately of its assets and depriving him of the fruits of judgment. Thus, at the close of his skeleton argument, Mr Parsons stated, under the heading "Overview":

"Taking an overview, Mr and Mrs Hawkins have by their actions effectively deprived Mr Sims of the fruits of his judgment on liability and quantum, depriving him of any realistic opportunity of recovering his costs from the [company]. Further, in the light of the learned judge's findings of fact, it is difficult if not impossible to believe this outcome is anything other than the deliberate, intended, outcome, engineered by Mr and Mrs Hawkins cynically and in bad faith."

41. That submission did not survive oral argument, when Mr Parsons properly acknowledged that he was in no position to argue either that Mr Sims had been deprived of the fruits of judgment; or that Mr and Mrs Hawkins had been guilty of bad faith or any form of impropriety. The findings to support that submission simply had not been made by the judge. If anything, the judge's findings were to the contrary, and he consciously directed himself on the basis that the section 51 jurisdiction could operate even in the absence of any impropriety.
42. Moreover, since Mr Parsons accepted that the judge had been correct both in his restatement of the law and in his findings of fact, he also acknowledged that his essential argument was that the judge had erred in his discretion, in the application of the law to the facts. In this connection, he focussed on two matters in particular which he said went to the weight of the various factors which the judge had to consider, and which the judge had mentioned in his reasons for granting permission to appeal, when he said –

"Not without hesitation (because of the danger of promoting satellite litigation and because my decision was, again, one of discretion) I grant permission to appeal on this issue because it raises two questions, on the particular facts, which are of some importance: (1) is it sufficient for the making of a non-party costs order against the directors of a company that they should have maintained the company's defence after it ceased trading (contrast the position where a dormant company is the claimant – Longmore LJ in Petromec…at para 17); and (2) how much weight should be attached to the fact that the directors were not placed on notice that they were at risk of a personal order for costs until at or shortly before trial?"

43. As to the first of these issues, Mr Parsons pointed to what he submitted was the judge's rejection in paras 38/40 of his judgment (cited above) of any possibility of the company's defence being maintained and funded in the company's own interests. The logical consequence was that whatever might have been the motives of Mr and Mrs Hawkins in funding that defence must have been personal to themselves and not in the interests of the company. When, therefore, the judge went on to suggest that there was any need to find a time when the funding of the defence switched from being in the interests of the company rather than in the directors' own interests, he erred: he was inconsistent, and his reasoning lacked coherence. Mr Parsons also relied on a passage in Petromec where Longmore LJ referred to the evidence of the principal of the claimant company himself (at para 17) in order to comment that where that company had been "dormant with the exception of pursuing claims", it was evident that the claim was for the benefit of that principal.
44. As for the matter of notice, Mr Parsons submitted that the judge had given it altogether too much weight. There was no need for any notice. Mr and Mrs Hawkins were experienced business people, who had consulted their solicitors from the outset. They ought to have known what the risks were, and it was to be inferred that they did. To the extent that the judge decided otherwise, he had erred in fact. In referring to the role of the factor of notice played in the authorities, such as Wiggins (in para 43 of his judgment), the judge had erred in failing to recognise that that was a very different case.

Discussion

45. It has taken a little time to set out the material in this appeal, but it is now possible to deal with the limited issues quite briefly.
46. First, there is the point about the interests of the company and Mr and Mrs Hawkins. I can quite see the argument that the judge has, within a few paragraphs of a reserved judgment, contradicted himself in a bald and incoherent manner. As Mr Parsons submitted, he had "forgotten" by para 42 of his judgment what he had implicitly found in paras 38/40 of his judgment, namely that Mr and Mrs Hawkins were acting only in their own interests and not those of the company. In my judgment, however, such a reading is not one to be adopted unless it is necessary to do so. It is highly unlikely. I do not think such a reading is necessary. When the judge poses to himself the question whether the company's defence was in the interests of the company or of Mr and Mrs Hawkins personally, he repeatedly states that it began as one and ended as the other, and that he has to find the time when the position switched from the one to the other. Thus at the end of para 41 he states: "From that point, I think it is right to conclude that the continued funding of the defence was in their own interests rather than the interests of the company." At the beginning of para 42 he continues: "The difficult question is in fixing the point of time at which it can be said that personal motives rather than the interests of the company began to fuel Mr and Mrs Hawkins' determination to see the litigation through." He reasons further: "I am not persuaded that it [the element of personal interest] existed from the outset of the action." The judge then breaks off (in para 43) to consider the relevance of the time when it could reasonably be said that Mr and Mrs Hawkins ought to have realised that they were at risk of being required to pay Mr Sims' costs themselves, if the company lost, and says it was "some time before the trial". At para 44, he concludes that Mr and Mrs Hawkins funded "the defence of the trial substantially for their own benefit" (emphasis added) and that the point at which they should be liable to pay Mr Sims' costs should be 1 October 2005. That is a plain series of findings that the involvement of Mr and Mrs Hawkins, which in terms of control and funding plainly went back well before the trial, was substantially in their own interests and for their own benefit only from 1 October 2005, and not before. In that connection, the judge was able to show (as he had done at para 41) that Mr Hawkins had himself submitted that he wanted trial in order to recoup the heavy costs incurred.
47. How are those series of plain findings to be turned on their head? It is said that in the immediately preceding passage of his judgment (paras 38/40) the judge had considered two possible explanations of the company's interests and rejected them both. The first, an explanation put forward by Mrs Hawkins, was that the defence was a vindication of the company's reputation. The judge said that this evidence had a "hollow ring". He was unable to accept that "the" motive or the "primary" motive for funding the defence was a desire to vindicate the reputation of the company. Secondly, the judge considered the possibility that the company was kept alive for further projects, a justification not put forward by Mr and Mrs Hawkins, and one which he questioned. Mr Parsons submits that this was a complete rejection of any interest of the company. In my judgment it was not, as is plainly seen by the ensuing paragraphs already referred to. The judge was considering reasons why Mr and Mrs Hawkins might be supposed to have no liability whatsoever for payment of Mr Sims' costs. He considered a number of submissions, and was satisfied by none of them entirely. What he was rejecting at this point was a submission that throughout the proceedings Mr and Mrs Hawkins were motivated solely or primarily by company and not personal considerations. It is clear from his judgment as a whole that he was unable to accept that submission. Nevertheless, he accepted that "the reputation of the company was inextricably bound up with the name of Roger Hawkins" and that "It was as much the reputation of Mr Hawkins which was at stake" (emphasis added). In other words, it was six of one and half a dozen of the other. He had also previously accepted that the company's defence was bona fide, and indeed he must have had in mind that it had very nearly succeeded. In this connection he mentioned the change of the name of the company in July 2004 to Abendigo Property Limited, in part because it shows an attempt to protect the reputation of the company (and no doubt the Hawkins name).
48. In these circumstances, I consider that, in fairness to the judge, his judgment has to be read as a whole, and that, read as a whole, he plainly considered that the question of reputation, if valid at all, cut both ways equally, and was not decisive. He clearly had in mind all along that the question he had to decide ultimately was not necessarily an all or nothing question, and that his real difficulty was as much in saying what the interests of Mr and Mrs Hawkins were, as in saying what those of the company were. The two cases could not of course be considered in isolation of each other, if the ultimate question was who the "real party" in the litigation was. So, in para 41, he asked himself ("Another reason" etc) why Mr and Mrs Hawkins should have funded the defence. He had not accepted any submission that it was done as a matter of self-protection by cynical and dishonest directors. Why, then, if, as Mr Parsons suggested, it is a matter of complete indifference to a dormant company of little means and its directors whether or not it is forced to accept a liability which it disputes, did Mr and Mrs Hawkins conduct and fund its defence? Because, said the judge, with his careful analysis, the matter proceeded by stages, the defence was bona fide and properly arguable, but there came a point when it was driven by a desire to recoup the costs committed by Mr and Mrs Hawkins. He had in mind that the case of a defendant and its funders is not necessarily the same as that of a claimant and its funders (see para 36, citing Goodwood Recoveries at para 48). While the section 51 jurisprudence shows that non-party costs orders certainly can, and have, been made against the funders of defendants, their positions are not necessarily the same. A speculative claim does not have to be brought; but a defence has to be made or else, in the absence of settlement, there has to be submission to judgment.
49. In this connection, although it is not a point expressly brought into play by the judge, it is relevant to observe, as Ms Katie Scott submitted on behalf of Mr and Mrs Hawkins, that as late as April 2005 the company (then unrepresented) repeated its offer of a drop hands settlement. That would not have recovered any costs for Mr and Mrs Hawkins.
50. As for Petromec v. Petrobras, which Mr Parsons relied on, it seems to me that that is just an instance where this court upheld the discretion of the first instance judge, in a strong case. Petromec had brought a large claim arising out of the construction of an oil rig, which had subsequently been lost. As a result of the loss, $147 million was paid by Petrobras to Petromec, and that (save for $2 million) had been paid out to Petromec's parent company. The judge found that Petromec's principal, Mr Efromovich, controlled, funded, and would have personally benefited from Petromec's claim (para 3 of Longmore LJ's judgment). It was in those circumstances that Longmore LJ cited Mr Efromovich's own evidence that Petromec was dormant save for pursuing its claims as supporting the judge's finding that the claim was for the benefit of those interested in Petromec (at para 17). In my judgment, to rely on this incidental passage in Petromec, so much bound up in its own facts, is to run the danger referred to by Longmore LJ of over-complicating the exercise of the section 51 jurisdiction by reference to authority.
51. I therefore turn to the question of notice. I do not think the judge erred here. His critical reasoning was that it was only from 1 October 2005, in the run-up to trial, that the defence was conducted substantially for the benefit of Mr and Mrs Hawkins. In that connection, even before notice to them at trial in December 2005 that Mr Sims would be looking to them for his costs, the judge found that as from 1 October 2005 Mr and Mrs Hawkins ought reasonably to have appreciated that they were personally at risk for Mr Sims' costs. The judge was not satisfied that the same was true before then. Therefore liability did not depend on express notice. Nevertheless, it or its absence was, as the judge said (at para 43) "only a factor". Plainly, if express notice had been given earlier, then it would have spoken for itself. This was in the context of a claim where Mr Sims was on notice that the company was without or only of very limited means, and where even so he had not sought to put Mr and Mrs Hawkins on notice that he would be looking to them, if he was successful, for his costs. Mr Parsons accepted that the giving or absence of notice was relevant, and had to submit that the judge gave it so much weight as to amount to an error of law or principle. I do not think he did.
52. In this context, Mr Parsons submitted that the judge had erred in referring for support to "statements in authorities (see eg Ward LJ in Wiggins…)". He said that Wiggins was a very different case. So it was. It was a case where the parents of a badly disabled claimant (who sued by a next friend) were made personally liable for their son's costs, when his claim failed. The parents had tried to have themselves made parties, but had failed against the defendant's resistance to their application. In those circumstances, this court said the first instance judge had erred, and referred to what Balcombe LJ had said in Symphony Group at 193 (guideline (3)): namely that, in a case where the successful party has a cause of action against the non-party but does not join him, he should warn the non-party at the earliest opportunity of the possibility that he may seek to apply for costs against him. However, the judge only intended that as an example of the application of that guideline in the cases. That guideline, and it is of course a guideline only, has not infrequently been referred to in the authorities, and has been acknowledged as generally applicable, and not only in cases where the non-party could have been made a substantive party. One example is Re North West Holdings plc, a case in this court where a section 51 order against the director of an insolvent company which had defended a winding-up petition was upheld. Nevertheless, Aldous LJ said (at para 37):

"I have been concerned that Mr Backhouse was not warned by the Secretary of State that an application might be made that he should pay the costs until after judgment on the petitions. The requirement for a warning at the earliest opportunity was clearly laid down in Symphony Group…I doubt whether after judgment was the earliest opportunity; but taking the matter as a whole the absence of an early warning is not, in my view, sufficient ground for depriving the Secretary of State of the order for costs granted by the judge."

Mance LJ and Charles J (see para 58) agreed.

53. Finally, I would like to say something about the structure of the argument on this appeal. Once the argument on impropriety was stripped away, the issue became one of the rational exercise of a broad discretion, where the judge's treatment of the law and facts was not challenged, save for an attempt to promote one finding into inconsistency with another. In my judgment, for all the reasons which have been so often stated in many cases, such an exercise of discretion should not be faulted unless it can be seen to be plainly wrong, on one of the traditional grounds. I think this is not such a case for interference. As Lord Goff said in The Vimeira, courts of first instance are well capable of exercising their discretion under the statute in accordance with reason and justice. The judge here knew far more about this litigation than we could know. He could understand how close a contest it had been. He appreciated how the conduct of the parties fluctuated during the proceedings. At first the defence did not take the claim seriously and declined an invitation to mediate; in the end it was Mr Sims who the judge thought failed to take the mediation sufficiently seriously. The judge could equally appreciate how the question of who was the real party could change in the course of the proceedings. He produced two careful judgments. He was entitled to conclude that reason and justice required the answer to which he came. It is possible that another judge, with the same experience and knowledge, might have come to another, more black and white answer. That, however, is not the point.
54. In this context, I have a particular concern that if this court reaches into this litigation and were to find, basing itself on a single strand of the argument, that there was a cogent enough point to be made, on at any rate one view, and on that ground were to change the section 51 order, necessarily without the opportunity of giving due consideration to all that the judge must have had in his mind when finally disposing of the case in his second judgment, then there is a danger of injustice being done: both in this case and in other like cases, where a broad discretion is attacked on appeal.

Conclusion

55. I would therefore dismiss this appeal.

Postscript

56. I cannot leave this judgment without making some comment on the disproportionate costs expended on this litigation, which I consider a matter for great regret. On any view, the claim was not a large one, albeit much larger than the ultimate liability found. The original floods, twice in one autumn, were followed by remedial work performed by the company. No floods have followed since, although, as the judge's judgment makes clear, the ultimate test should be over a longer period than that, conventionally twenty-five years. Ultimately, the judge found that further works costing only in the region of £15,000 would have been appropriate. They could have been performed by either party. By December 2002, Mr Sims had sold unit 2 to his neighbours, for what the single joint expert was to say was a full unblighted market price, albeit the judge ultimately found, erring as he said on the generous side, that a further £15,000 might have been obtained. In these circumstances, it is very sad indeed that, as we are told, so much has been spent on these proceedings. There certainly were opportunities for settlement, but unfortunately they were not taken. Of course, it takes two to settle. But the litigants seem to have been prepared to commit themselves to costs without considering carefully enough the rationality of doing so.
57. An example arose on this appeal. My Lord, Lord Justice Keene asked at the outset of the hearing how much was involved in the appeal, that is to say in the attempt to take back the date of non-party liability to pay costs to the time of the letter before action, or, less optimistically, to the start of any funding by Mr and Mrs Hawkins. Mr Sims' representatives were not able to tell us without performing a calculation. The figure which was then advanced was £169,000 in respect of Mr Sims' costs from the letter before action to 1 October 2005, or £151,000 in the period between 31 May 2002 and 1 October 2005. That may be so, although these figures exceeded that of £130,000 which had at an earlier stage been advanced as Mr Sims' total costs down to trial, a figure that was in evidence. It appears from the parties' costs schedules for the appeal that upwards of £40,000 has been staked on this appeal. I am concerned that parties and their legal advisers should be well advised and cognisant of the dangers in terms of costs of litigating about what at any rate in the first instance are comparatively small sums in a manner which is only commensurate with much larger issues at stake. It does not assist for one litigant (Mr Sims) to be thinking or writing (his letter dated 7 December 2000): "There is no limit to which I am prepared to go to legally resolve this issue in my favour and, should you prefer to go to litigation on this, I intend to bring an unrestricted awareness and publicity to this case on a national level"; or for the other litigant (the company) to be thinking or writing this (its solicitors' letter dated 6 January 2003): "We have previously made plain that our client will pay nothing to your client. That remains and will always remain the case." Litigation should be proportionate to the need for reasonable remedies, not an exercise in attrition.

Lord Justice Keene : I agree.

Lord Justice Lloyd : I also agree.

Note 1   “The court shall have full power to determine by whom and to what extent the costs are to be paid.”    [Back]

Note 2   A schedule put in by Mr and Mrs Hawkins suggests that down to end May 2006, total fees incurred by the company amounted to £88,949.39 net, of which £12,064.02 was still owing to solicitors, and £1,625.95 had been paid to Cresswell & Co (Mr Sims’ solicitors). On this basis, the company had incurred far less costs than the figure of some £300,000 spoken of by Mr Sims as having been incurred on his side. It may be, however, that the schedule does not include experts’ fees.     [Back]

Note 3   See at para 27 above    [Back]

Note 4   Where the judge had cited Lord Brown at para 29 of Dymocks    [Back]