ON APPEAL FROM THE GUILDFORD COUNTY COURT
HIS HONOUR JUDGE REID QC
LOWER COURT No: 5GL02234
Strand, London, WC2A 2LL
B e f o r e :
LORD JUSTICE LLOYD
MR JUSTICE LEWISON
| SYSTEMCARE (UK) LIMITED
|- and -
|(1) SERVICES DESIGN TECHNOLOGY LIMITED
(2) KHAJA AZHAR SHARIF
Michael Fullerton (instructed by Bennett Griffin LLP) for the Claimant (/Respondent)
Hearing date: 18 April 2011
Crown Copyright ©
Mr Justice Lewison:
"In making the detailed assessment the District Judge shall have particular regard to (1) the principle of proportionality (2) the excessively voluminous nature of the trial bundles and (3) the duplicated claim for counsel's brief fee "
" having regard to how the claim was instigated by Mr Sharif reversing direct debits of [SDT] to [Systemcare] and by then making a baseless and large counterclaim against [Systemcare] Mr Sharif should be personally liable for the costs of the action of [Systemcare] as ordered by this court."
".. based upon the judgment, it is clear that [Mr Sharif] was the real party interested in the outcome of litigation, was responsible for causing the instigation of proceedings, that the counterclaim was brought in bad faith or for an ulterior purpose and that other conduct, referred to in the judgment, makes it just and reasonable for such an order."
" proper disclosure of the affairs of [SDT] will show that it had the ability to pay costs Orders and that its voluntary liquidation was a decision by Mr Sharif to avoid payment to [Systemcare] of the monies and costs due under Court Orders."
i) He prepared the initial defence and counterclaim in good faith on behalf of SDT, believing that it was in the interests of the company to bring the case, and that it would result in an order for compensation in its favour. He believed that SDT would win. He believed that SDT was well able to fund the costs of the litigation. But because he did not expect SDT to lose, he did "not spare much thought" to the risk that it might incur a substantial costs liability (§ 9).
ii) During most of the period of litigation SDT seemed to him to be "in healthy financial shape and able to fund the costs as required" (§ 10).
iii) SDT's finances declined in 2006 and deteriorated more sharply in the first half of 2007 (§ 15).
iv) In August and September 2007 he procured inputs of funds for SDT from WEPS. These inputs amounted to some £33,000 (§ 16). When judgment was given Mr Sharif procured a further £22,000 from WEPS with a view to meeting the costs liability, but was advised that that payment might be a preference (§ 19).
"On the evidence, the company was clearly solvent in May 2007 and capable of paying the Order of Costs under the Default Costs Certificate The judgment on the claim together with interest on 2nd November 2007 in the sum of £2,199.26 was not a sum that caused the company to become insolvent."
"In my judgment there is some force in the complaint that the case put against Mr Sharif was not formulated clearly, but in the end he can have been under no illusion that what was being asserted was that he was running a counterclaim in the full knowledge that if it failed there was no prospect of [SDT] being able to pay the costs awarded against it."
i) The case was brought about by Mr Sharif's actions. It was his dishonesty that caused the litigation (§ 24).
ii) The counterclaim rested on Mr Sharif's own discredited evidence of fact. The loss alleged was "at best fanciful" (§ 25).
iii) Systemcare had no realistic opportunity to apply for security for costs (§ 26).
iv) The liquidator's view that SDT was not insolvent at the date of the judgment was flawed; not least because he had discounted SDT's main creditors who could have demanded repayment at any time. There was no realistic prospect that Systemcare would receive anything if a substantial order for costs were made against SDT (§ 27)
"The discretion to award costs against non-parties may be exercised in a variety of circumstances, such as whether the third party is considered to be the real party interested in the outcome of the litigation; or, where the third party has been responsible for bringing the proceedings and they have been brought in bad faith or for an ulterior purpose, or there is some other conduct that makes it just and reasonable to make an order."
i) Systemcare was locked into litigation without merit and without justification by SDT acting through Mr Sharif (§ 29). It was put to great expense by the manner in which Mr Sharif chose to act (§ 30).
ii) The entirety of the costs of the litigation would not have been incurred but for Mr Sharif both by cancelling the direct debit and by supporting SDT by giving evidence that could not be accepted (§ 31).
iii) Mr Sharif would have been the beneficiary of the litigation, subject to his wife's minority share (§ 31).
iv) For all practical purposes the litigation was funded by Mr Sharif, in that it was kept afloat by injections of cash from his other interests (§ 31).
"(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
(a) the civil division of the Court of Appeal;
(b) the High Court; and
(c) any county 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."
i) 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;
ii) Where a person has maintained or financed the action;
iii) Where the person has caused the action;
iv) Where the person is a party to a closely related action which has been heard at the same time but not consolidated;
v) Group litigation where one or two actions are selected as test actions.
i) 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 (§ 25 (1)).
ii) Where the non-party not merely funds the proceedings but substantially also controls or at any rate is to benefit from them, justice will ordinarily require that, if the proceedings fail, he will pay the successful party's costs (§ 25 (3)).
iii) 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 or appeal fails. However, that is not to say that orders will invariably be made in such cases; particularly 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 (§ 29).
"The authorities establish that, whilst any impropriety or the pursuit of speculative litigation may of itself support the making of an order against a non-party, its absence does not preclude the making of such an order."
"I would only observe that, although funding took place in most of the reported cases, it is not, in my view, essential, in the sense of being a jurisdictional pre-requisite to the exercise of the court's discretion. If the evidence is that a respondent (whether 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."
"The court has a discretion to make a costs order against a non-party. 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 considered to be the real party interested in the outcome of the suit. It may also be made where the third party has been responsible for bringing the proceedings and they have been brought in bad faith or for an ulterior purpose or there is some other conduct on his part which makes it just and reasonable to make the order against him. 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 bought 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 the separate liability of the company would be eroded and the principle that such orders should be exceptional would be nullified." (Emphasis added)
"Where a non-party director can be described as the "real party", seeking his own benefit, controlling and/or funding the litigation, then even where he has acted in good faith or without any impropriety, justice may well demand that he be liable in costs on a fact-sensitive and objective assessment of the circumstances. It may also be noted that in Lord Brown's comments at para 33 of his opinion "the pursuit of speculative litigation" is put into the same category as "impropriety"."
"This is a hopeless contention. The sum of $2 million was only left in Petromec because its holding company Petromec Holdings Ltd, which was itself controlled by Synergy Group Corporation chose to leave it there instead of taking it out along with the other $145 million or so representing the Total Loss Payment. It was thus the owner of Synergy Group Corporation who decided to use the $2 million to fund the start of the litigation, in other words Mr Efromovich."
i) Whether Mr Sharif was the real party interested in the outcome of the litigation;
ii) Whether Mr Sharif was responsible for bringing the proceedings;
iii) Whether the proceedings had been brought in bad faith; and
iv) Whether there was some other conduct that made it just and reasonable to make an order.
"[Mr Sharif] was the real party interested in the outcome of litigation, was responsible for causing the instigation of proceedings, that the counterclaim was brought in bad faith or for an ulterior purpose and that other conduct, referred to in the judgment, makes it just and reasonable for such an order."
"The judge should be alert to the possibility that an application against a non-party is motivated by resentment of an inability to obtain an effective order for costs against a legally aided litigant. The courts are well aware of the financial difficulties faced by parties who are facing legally aided litigants at first instance, where the opportunity of a claim against the Legal Aid Board under section 18 of the Legal Aid Act 1988 is very limited. Nevertheless the Civil Legal Aid (General) Regulations 1989 (S.I. 1989 No. 339/89) , and in particular regulations 67, 69, and 70 , lay down conditions designed to ensure that there is no abuse of legal aid by a legally assisted person and these are designed to protect the other party to the litigation as well as the Legal Aid Fund. The court will be very reluctant to infer that solicitors to a legally aided party have failed to discharge their duties under the regulations - see Orchard v. South Eastern Electricity Board  Q.B. 565 - and in my judgment this principle extends to a reluctance to infer that any maintenance by a non-party has occurred."
"I would also comment that there appears to me to be a danger of treating the requirement that the circumstances are "exceptional" as being part of the statute to be applied. It is not. In none of the cases to which I have referred have "exceptional circumstances" been elevated into a precondition to the exercise of the power; nor should they be."
Lord Justice Lloyd
"It is not an abuse of the process of the court or in any way improper or unreasonable for an impecunious plaintiff to bring proceedings which are otherwise proper and bona fide while lacking the means to pay the defendant's costs if they should fail. Litigants do it every day, with or without legal aid. If the plaintiff is an individual, the defendant's only recourse is to threaten the plaintiff with bankruptcy. If the plaintiff is a limited company, the defendant may apply for security for costs and have the proceedings dismissed if the plaintiff fails to provide whatever security is ordered."
"The controlling director of a one-man company is inevitably the person who causes the costs to be incurred, in one sense, by causing the company to defend the proceedings. But it could not be right that in every such case he should be made personally liable for the costs, even if he knows that the company will not be able to meet the plaintiff's costs, should the company prove unsuccessful. That would be far too great an inroad on the principle of limited liability. I do not say that there may not be cases where a director may not properly be liable for costs. Thus he might be made liable if the company's defence is not bona fide, as, for example, where the company has been advised that there is no defence, and the proceedings are defended out of spite, or for the sole purpose of causing the plaintiffs to incur irrecoverable costs. No doubt there will be other cases. But such cases must necessarily be rare. In the great majority of cases the directors of an insolvent company which defends proceedings brought against it should not be at personal risk of costs."
Lord Justice Ward