By Stuart Eustice, Partner and Gregor Campbell, Lawyer

The Court of Appeal was recently required to consider the rare decision by the Supreme Court to pierce the corporate veil and join a sole director to a punitive costs order. In doing so it took the opportunity to discuss the circumstances in which a non-party may be joined to a costs order.

Background

The Applicants in this matter were milk powder distributors who began proceedings against the Respondents, their delivery providers, alleging the Respondents had defrauded them by purportedly delivering stock to the Applicants’ customers when in fact those goods were unlawfully taken and sold to third parties.

When commencing these proceedings, the Applicants applied for and were granted a freezing order against the Respondents, to prevent the dissipation of assets.

The proceeding however dragged on for two years with multiple failed mediations, an eventual abandonment of the allegations of fraud and importantly, a rejected Calderbank offer being made on behalf of the Respondents offering to settle the claim on the basis that each party walk away and bear their own costs.

The Applicants eventually discontinued their claims against the Respondents and as a result were required to pay the Respondents’ costs. This was uncontroversial however, a dispute which resulted in this appeal arose when the Supreme Court’s decided to award the Respondents indemnity costs and to join the Applicants’ director to the costs order despite the director not being a party to the original proceeding.

Held

The Court of Appeal upheld both costs orders noting that it is uncontroversial that indemnity costs may flow from the Applicants’ rejection of the Respondents’ Calderbank offer. The Court noting that it was open to the Applicants at this point, through an examination of their own files, to recognise the weakness in their case and withdraw.

With respect to the more novel decision to join the Applicants’ director to the cost order, the Court of Appeal noted the Applicants’ director was the driving force behind bringing and maintaining the claims of fraud and serious misconduct against the Respondents. The director had also personally refused to accept the Respondents’ Calderbank offer or to discharge the freezing orders despite the Respondents’ repeated requests.

Further through examination of the Applicant’s financial records the Court of Appeal noted the ability of one entity to pay the substantial cost order was almost entirely dependent on the director’s decision to make the funds available from other entities within the corporate structure he controlled.

Relevance

This case set outs the key points a Court will consider when determining whether to join non-parties, particularly sole directors, to cost orders. Key points may include their control both over the course of the litigation and over a company’s funds.

This decision also stands as a warning to sole directors who are considering beginning baseless proceedings noting that they stand to become personally liable for their opponents’ costs.