Costs order made against a group company that funded litigation

The High Court has found that a third-party costs order can be made against a company that funds, stands to benefit from and controls a claim by another group company. The company providing funding was considered to be a real party to the litigation. However, merely being in the same group as the claimant did not create a costs exposure.

In Montpelier Business Reorganisation Ltd v Armitage Jones LLP [2017] EWHC 2273 (QB), the claim was brought by a dormant company, funded by a loan from its major shareholder, a company in the same group. The claim failed, and costs were awarded to three defendants. The claimant was insolvent and unable to pay. One of the defendants sought to recover costs from the company funding the claim and another company in the same group as the claimant, but not involved in the litigation.

Saffman J ordered costs against the funding company, as it was considered a real party to the litigation. He highlighted the fundamental principle that it is wrong to allow a party to fund litigation in the hope of gaining a benefit without taking on the risk of having to pay a defendant’s costs if the claim is unsuccessful.

By contrast, he considered that it was not appropriate to make a costs order against the third group company, for the following reasons:

• There was no evidence it was funding or exercising any control over the claim.
• It had no control over how the funding company would spend any money recovered. Any benefit to it was contingent rather than direct.
• It was not right in principle to make an order against it simply because it was a group company.
• The White Book sets out a list of entities vulnerable to third-party costs orders, and shareholders and group companies are conspicuous by their absence.

The judge rejected an argument by the defendant that if that group company was not liable for costs, groups would be able to avoid paying costs by ensuring that neither the claimant nor the company in whose interest the litigation is pursued had the means to pay costs awarded against them.

Comment

This case highlights the need for companies to consider their costs exposure when facilitating or influencing the conduct of litigation by another company in the same group.

For more information, please email the authors or your usual CMS contact.