Skip to content

Court of appeal considers “economic realities” in awarding costs order against a company director

30 January 2014

In the case of Axel Threlfall v ECD Insight Ltd & anr [2013] EWCA Civ 1444, 29 October 2013, the Court of Appeal, in overturning an earlier High Court decision, has ruled that costs akin to those awarded against non-parties may in fact be awarded against a party to a claim.

This is the first time the courts have exercised their discretionary powers relating to costs under s51 of the Senior Courts Act (the SCA) in this way. The court acted to ensure that after the defendant company had gone into liquidation, it was able to award a costs order against the company’s sole director and shareholder (and co-defendant to the claim). The High Court had sought to establish the director’s substantive liability before awarding costs, but this was held to be unnecessary. Rather the crucial considerations were the “economic realities” of the case and the director’s poor conduct.

Background

Mr Threlfall was an employee of ECD. He brought an action for breach of his employment contract against ECD and its sole director and shareholder, Mr Whitney. Mr Threlfall said that his employment contract was varied by agreement between himself and Mr Whitney and that he was therefore entitled to a 20% share in the equity of ECD, share dividends, a termination payment and a bonus payment. ECD denied the claim and counter-claimed, alleging breaches by Mr Threlfall both of his obligations of fidelity and also of restrictive covenants in his employment contract. Mr Whitney had been joined as a party to the action because any order for specific performance (to procure the transfer or issue of shares to Mr Threlfall) would have required a transfer of shares by Mr Whitney or required ECD to issue and allot, therefore diluting Mr Whitney’s sole shareholding.

The High Court decision

The High Court did not find Mr Whitney’s evidence credible and further found that he “was seeking to resile from the agreement he made … because the financial implications of doing so were damaging both to ECD and to himself personally”. Mr Threlfall was ultimately successful overall and judgment for Mr Threlfall was entered against ECD for the sums of money specified in the order (Mr Threlfall having elected to take payment rather than shares in specie). Judgment for ECD was entered against Mr Threlfall for nominal damages for breach of the obligation of fidelity. Mr Threlfall’s counsel applied to the judge that Mr Whitney should be jointly and severally liable with ECD for the costs of the action. It was submitted that this was the kind of case in which any application against Mr Whitney “ought to be considered by analogy to a non-party costs order” under s51 of the the SCA.

Section 51(3) of the SCA states that “the court shall have full power to determine by whom and to what extent the costs are to be paid”. The Court of Appeal had previously laid down guidelines for the exercise of this power against non-parties in Symphony Group v Hodgson [1993] 4 All ER 143, CA, including that such an order should always be exceptional.

The High Court said that ECD was a solvent company which ran a legitimate defence at trial and that it was not necessary for an order to be made against Mr Whitney. Less than a month later, ECD went into insolvent liquidation. Mr Threlfall appealed on the issue of the judge’s order for costs only.

The Court of Appeal decision

Lewison LJ held that the High Court had erroneously linked the question of whether costs were payable by Mr Whitney to the question of Mr Whitney’s own substantive liability in respect of the claim, with a positive finding as to the latter being held as a pre condition to the former. It had therefore omitted to deal with the important point that non-party costs orders are made against persons against whom there is no substantive cause of action. Lewison LJ held that “the exercise of discretion to make a non-party costs order leaves rights and obligations where they are”. This meant that there was no need to consider issues of piercing/lifting the corporate veil: the court was not fettered by legal realities and was entitled to look at economic realities. Accordingly, Lewison LJ listed eleven factors which he said, taken cumulatively, made it just for the court to allow the appeal and order costs against Mr Whitney. These factors included: that the High Court stated that ECD was under Mr Whitney’s absolute control, he did not regard himself as accountable to anyone else, Mr Whitney sought to resile from the contract and Mr Whitney’s evidence was given in bad faith.

Comment: This case evidences the wide-ranging discretion the courts have under s51 of the SCA in determining costs orders, with the Court of Appeal ruling for the first time that in certain circumstances it might be appropriate to impose what is essentially a non-party costs order on a party to a claim. It confirms that the court will look first and foremost at achieving a just outcome for the parties, taking into account factors such as the economic realities of the case and the conduct of the parties involved.

Further, the court’s confirmation that, in exceptional circumstances, a costs order analogous to a non-party costs order could be made against a director of a company without piercing the corporate veil (as the question of his own substantive liability was irrelevant for the purposes of the order) is of particular note.

Further information

This case summary is part of the Allen & Overy Litigation Review, a monthly update on interesting new cases and legislation in commercial dispute resolution. For more information please contact Sarah Garvey sarah.garvey@allenovery.com, or tel +44 20 3088 3710.