Sony/ATV Music Publishing LLC & Anor v WPMC Ltd & Anor

A non-party costs order is a fact-specific exercise of discretion under the Senior Courts Act 1981, s 51(3). The ultimate question is whether the order is just in all the circumstances.

A person who controls and funds an insolvent company's litigation for personal financial benefit may be the real party and liable for costs. Proof that the person's interests diverge from the company's is unnecessary, and the order does not pierce the corporate veil. The court must weigh company and creditor interests, causation, funding, control and benefit.

An early warning is a material factor. Where credible evidence shows that warning would have enabled settlement, insurance, liquidation or an appeal, failure to warn may make an order unjust.

The respondents brought a copyright action against WPMC and Iambic. After the claim against Iambic was stayed and WPMC's defences failed, Arnold J ordered WPMC to pay costs and later, under the Senior Courts Act 1981, ordered Mr Bailey, its director and majority shareholder, to pay SATV's costs from 4 January 2013, with interest. The order appears in [2017] EWHC 389 (Ch).

Mr Bailey appealed the non-party costs order. SATV cross-appealed on the interest rate. The central issues were whether Mr Bailey was the real party, whether his limited funding justified an order, and what weight should be given to SATV's failure to warn him of the proposed application.

1. Outcome. The appeal was allowed and the non-party costs order was set aside. The cross-appeal did not arise.
2. Applicable principles. Section 51(3) of the Senior Courts Act 1981 gives the court jurisdiction to determine by whom and to what extent costs are paid, including by a non-party. The discretion must be exercised justly in all the circumstances. The court applied the principles in Aiden Shipping Co Ltd v Interbulk Ltd [1986] AC 965, Dymocks Franchise Systems (NSW) Pty Ltd v Todd and others [2004] UKPC 39 and Deutsche Bank AG v Sebastian Holdings Inc [2016] EWCA Civ 23.
3. A director need not have interests diverging from those of the company before an order can be made. A non-party who substantially controls and funds an insolvent company's litigation for personal financial benefit may be the real party. A non-party costs order does not pierce the corporate veil. The necessary causative link exists where the non-party's intervention enabled litigation which the company otherwise could not have pursued or defended. The proportionality approach in Arkin v Borchard Lines Ltd (Nos 2 and 3) [2005] EWCA Civ 655 applies to professional funders who leave the claimant primarily interested and in control, not necessarily to a real party.
4. Warning. The absence of an early warning is a material consideration. Where credible evidence indicates that a warning would have altered the non-party's conduct, it must be given appropriate weight. Caution is required when making summary findings about a non-party who was not a trial witness. The judge erred by rejecting Mr Bailey's evidence on the basis of hindsight and by treating the warning as having no weight. The reasoning in Symphony v Hodgson [1994] QB 179, Systemcare (UK) Ltd v Services Design Technology Limited [2011] 4 Costs LR 666 and Deutsche Bank was applied or distinguished according to the facts.
5. Fresh exercise of discretion. Mr Bailey controlled the defence, funded it to a limited extent and hoped to benefit personally. However, the defence also protected WPMC's interests and those of Firefly as a creditor. No impropriety had been established. SATV knew or should have appreciated that WPMC could not meet the costs, yet did not warn Mr Bailey until a year after judgment. He thereby lost realistic opportunities to settle, liquidate WPMC, obtain insurance or pursue an appeal. In those circumstances, making him liable was manifestly unfair and unjust.

1. Court of Appeal (Civil Division) allowed Mr Bailey's appeal and set aside the non-party costs order. The cross-appeal on interest did not arise: [2018] EWCA Civ 2005.
2. High Court, Chancery Division Arnold J made the non-party costs order against Mr Bailey, requiring him to pay SATV's costs from 4 January 2013, and subsequently awarded interest. The decision under appeal was reported at [2017] EWHC 389 (Ch).