Vaughan v Jones & Ors

A non-party costs order is exceptional only in the sense that it falls outside the ordinary run of litigation. The governing question is whether, in all the circumstances, making the order is just. Relevant considerations include whether the non-party caused the costs, whether it funded the litigation, and whether it obtained a personal benefit from its pursuit or outcome.

A pure funder ordinarily attracts no costs liability. A lender who provides finance on ordinary commercial terms likewise ordinarily falls outside the jurisdiction. Funding on non-commercial terms for an ulterior purpose may justify an order. A benefit need not be a direct share in the litigation’s proceeds, but the court must identify a genuine benefit connected with the funding. Transactions at an undervalue are ordinarily matters for the bankruptcy jurisdiction where that jurisdiction provides the appropriate remedy.

Michael Vaughan applied under section 51(3) of the Supreme Court Act 1981 for a third-party costs order against Mark and Jane Fowler. The application concerned costs incurred in proceedings brought by Ellen Jones against Mr Vaughan concerning the sale and leaseback of farmland and a related lease.

The Fowlers had provided funds which enabled Ms Jones to annul her bankruptcy, pursue her claim, seek permission to appeal after summary judgment, and defend Mr Vaughan’s counterclaim. They also obtained an option over, and later purchased, the bungalow in which Ms Jones lived. The central issue was whether the Fowlers were funders who obtained a sufficient personal benefit from the litigation to make a costs order just.

1. The application was dismissed. The court’s discretion under section 51(3) of the Supreme Court Act 1981 is fact-specific. The ultimate question is whether, in all the circumstances, it is just to make a costs order against the non-party.
2. It was usually important that the non-party’s conduct caused the applicant to incur the relevant costs. The Fowlers’ loans enabled Ms Jones to litigate, but causation alone did not determine the application.
3. The court applied the distinction identified in Dymocks Franchise Systems (NSW) Pty Ltd v Todd [2004] 1 WLR 2807. Pure funders, who have no personal interest and do not control or benefit from the litigation, ordinarily should not bear the successful party’s costs. Funders who substantially control or benefit from the proceedings will ordinarily be liable.
4. The benefit need not be a share in the litigation’s proceeds or avoidance of a liability. A narrower rule would create unjustified distinctions between funders pursuing their own interests. However, the court had to identify the benefit and connect it with the funding.
5. The payment used to annul Ms Jones’s bankruptcy was treated as the purchase price for an option, rather than as litigation funding. The initial £30,000 loan was commercially part of the consideration for that option. The Fowlers’ purpose was to obtain the bungalow, not to secure a benefit from the litigation’s outcome. The later advances and security raised different issues, but the evidence did not establish a sufficient ulterior purpose.
6. The alleged undervalue transactions were not a proper basis for the costs order. Ms Jones’s trustee in bankruptcy was the appropriate forum to investigate and, if justified, challenge transactions at an undervalue. A costs order based on the same transactions risked exposing the Fowlers to effectively double recovery.
7. The judge also indicated that an applicant for a non-party costs order should provide a concise statement of the grounds and essential allegations of fact, subject to amendment or supplementation if necessary.

First-instance application. No appellate history was stated in the judgment.