CIBC Mellon Trust Company & Anor v Wolfgang Otto Stolzenberg & Ors

A non-party costs order may be made against a shareholder who, without being a director or other person under a duty to act for the company, funds, controls and directs company litigation to promote or protect his own financial interest. The question remains fact-sensitive. Directors acting in good faith for the company’s benefit ordinarily retain the protection of separate corporate personality. The availability of security for costs does not prevent a later order against the funder. Detailed assessment pursued in compliance with the costs rules, and to resolve a substantial issue affecting liability, is not merely a tactical exercise without practical value. A refusal to make a non-party costs order based on that false premise is an erroneous exercise of discretion.

The claimants brought proceedings concerning substantial loans and investments in companies in the Castor Group. Default judgments and costs orders were entered against Mora Hotel Corporation NV and Chascona NV. Paolo Cavazza, a shareholder who was not a director, funded and controlled applications by those companies to set aside the judgments.

On 19 February 2004, Mr Justice Etherton ordered Mr Cavazza to pay the costs of the set-aside applications but refused to order him to pay the costs of the detailed assessment of costs. The claimants appealed against that refusal. Mr Cavazza cross-appealed against the order for the set-aside costs. The claimants also sought an order that he pay costs incurred in an earlier appeal. The central issues were the scope of the non-party costs jurisdiction and whether the judge’s exercise of discretion was flawed.

The Court of Appeal unanimously allowed the claimants’ appeal and dismissed Mr Cavazza’s cross-appeal. Lord Justice Chadwick gave the judgment, with Lord Justice Kennedy and Lord Justice Jonathan Parker agreeing.

1. Appellate review. The power to determine by whom costs are to be paid is conferred by sections 51(1) and 51(3) of the Supreme Court Act 1981. Its exercise is discretionary. An appellate court should interfere only where the discretion has been exercised on an erroneous basis or otherwise in error.
2. Non-party funders. The ordinary protection of separate corporate personality applies where a director acts in good faith and believes that litigation is for the company’s benefit. It does not prevent an order against a shareholder who is not a director, or another person under a legal duty to act in the company’s best interests, and who funds, controls and directs litigation to promote or protect his own financial interests. Whether an order is just depends on the facts. The reasoning was consistent with Metalloy Supplies Ltd v MA (UK) Ltd [1997] 1 WLR 1613, Fulton Motors Limited v Toyota (GB) Ltd and Chapman v Christopher [1998] 1 WLR 12.
3. Set-aside costs and security. The set-aside applications were exceptional and speculative. The availability, or possible insufficiency, of security for costs did not preclude a later order against the person who would in practice have provided it.
4. Detailed assessment. The claimants had a legitimate interest in quantifying substantial costs once the set-aside applications were made. They were also required by the costs rules to commence detailed assessment within the relevant period, subject to any extension. The assessment was necessary to resolve a major issue whether the companies were liable for all, or only part, of the costs. The judge therefore erred in treating it as a purely tactical exercise of no practical value. His discretion was exercised on a false basis.
5. Orders. Mr Cavazza was ordered to pay the costs of the detailed assessment, the claimants’ appeal, the cross-appeal, the application for prior appeal costs, and the related applications, on the standard basis.

1. Court of Appeal (Civil Division) On 24 May 2005, the court allowed the claimants’ appeal, dismissed Mr Cavazza’s cross-appeal, and made orders requiring him to pay the specified costs.
2. High Court, Chancery Division On 19 February 2004, Mr Justice Etherton ordered Mr Cavazza to pay the costs of the set-aside applications but refused an order for the costs of the detailed assessment. Permission to appeal was granted.