Petromec Inc v Petroleo Brasileiro SA Petrobras

The court’s discretion under section 51 of the Supreme Court Act 1981 to award costs against a non-party is not confined by rigid prerequisites. Actual funding is relevant but is not essential to jurisdiction. Effective control of proceedings and pursuit of a personal benefit may suffice.

The discretion requires a cautious, objective and fact-sensitive assessment. An existing order for security for costs is relevant but does not bar a non-party costs order where the security proves inadequate. A court will ordinarily hesitate where an insolvent company remains the real litigant, but may act where its controller is the real party pursuing the litigation for personal benefit.

Petromec brought unsuccessful proceedings arising from contractual arrangements concerning the purchase and upgrading of an oil production platform. Substantial costs orders in favour of Petrobras and Brasoil remained unpaid.

In the Commercial Court, Moore-Bick J ordered that Mr German Efromovich be joined and made jointly and severally liable for those costs. He found that Mr Efromovich controlled and funded Petromec’s litigation and would have benefited from its success. The decision appealed was reported as [2004] EWHC 127 (Comm).

Mr Efromovich appealed on the grounds that the evidence did not support those findings, that personal funding was a jurisdictional prerequisite under section 51 of the Supreme Court Act 1981, and that the security for costs obtained by Petrobras precluded or weighed decisively against the order.

1. Appeal dismissed. The judge was entitled to find that Mr Efromovich controlled Petromec’s proceedings, caused funds under his control to be made available for them, and would have benefited from any recovery. The further evidence admitted on appeal confirmed his beneficial interest in the relevant trust. The circumstances compellingly justified the non-party costs order.

2. Section 51 of the Supreme Court Act 1981 confers a broad discretion. Per Longmore LJ, actual funding is not an essential jurisdictional prerequisite. Effective control of proceedings and pursuit of a potential personal benefit may establish jurisdiction, although actual funding remains highly relevant to whether the discretion should be exercised. Laws LJ agreed that the provision is not confined by specific limitations and that the authorities should not be treated as a rule-book.

3. The statement in Goodwood Recoveries Ltd v Breen [2005] EWCA Civ 414 correctly described the governing approach. A non-party who is the real party, seeking personal benefit and controlling or funding the litigation, may justly be liable for costs following an objective and fact-sensitive assessment. The principle is not confined to company directors and can apply to an effective controller.

4. Dymocks Franchise Systems v Todd [2004] UKPC 39 did not establish funding as an indispensable requirement. Its reference to a non-party who promotes and funds proceedings could not be construed as statutory language, since the necessity of funding was not in issue there. Its account of the real-party principle was applicable to English law.

5. The availability and amount of security for costs are relevant discretionary considerations. An unexplained failure to seek available security may weigh against a later non-party application. Where security was obtained but proved insufficient, however, its existence did not prevent a further costs order against the person who had backed and controlled the insolvent company.

6. A court will ordinarily hesitate to impose costs on a liquidator, director or controller where proceedings are genuinely brought for the company’s benefit and the company is the real plaintiff. That principle did not assist Mr Efromovich because Petromec was otherwise dormant and he was the real party controlling the claims for the benefit of those interested in it.

1. Court of Appeal (Civil Division): The appeal was dismissed. The non-party costs order against Mr Efromovich was upheld: [2006] EWCA Civ 1038.
2. High Court, Queen’s Bench Division (Commercial Court): Moore-Bick J joined Mr Efromovich and ordered him to be jointly and severally liable for the unpaid costs awarded to Petrobras and Brasoil: [2004] EWHC 127 (Comm).