Deutsche Bank A.G. v Sebastian Holdings Inc & Anor.  EWCA Civ 23
The Courts have power to order that a non party pay the costs of an action under section 51(1) and 51(3) of the Senior Courts Act 1981 (“SCA 1981”). Section 51(1) SCA 1981 gives the discretion to make orders for the costs of and incidental to all proceedings. Under section 51(3) SCA 1981 the Court has full power to determine by whom and to what extent the costs are to be paid.
The Court of Appeal had previously set out guidelines in the matter of Symphony Group Plc v Hodgson  QB 179 (“Symphony”). In summary this guidance is as follows:
1. An order for payment of costs by a non-party will always be exceptional.
2. It will be even more exceptional where the applicant could have joined the non-party to the proceedings.
3. A warning should be given to the non-party of the possibility that an application for costs may be made against him as soon as possible.
4. Such an application should normally be determined by the trial judge.
5. Just because the trial judge may have expressed opinions on the conduct of the non-party, that does not constitute bias or the appearance of bias.
6. The procedure for the determination of costs is a summary procedure and so judicial findings are usually inadmissible against a non-party but that may not be the case if as a result of proximity to the proceedings, the non-party would not suffer an injustice by it.
7. An award of costs against a non-party witness is an exception to the general principle of witness immunity.
8. The fact that an employee or even a director of a company gives evidence does not normally mean that the company is taking part in the action.
Further guidance was issued by the Privy Counsel in Dymocks Franchise Systems (NSW) Pty Ltd v Todd  UKPC 39 (“Dymocks”). In summary, it was confirmed as follows:
1. “Exceptional” in this context means no more than outside the ordinary run of cases where parties pursue or defend claims for their own benefit and at their own expense.
2. Generally speaking the discretion will not be exercised against “pure funders” of the litigation.
3. If the non-party is the “real party” to the litigation i.e. substantially controls or is to benefit from proceedings, if the proceedings fail, justice will ordinarily require that he pay the costs.
Deutsche Bank A.G. (“DB”) obtained a money judgment against Sebastian Holdings Inc (“SH”) in the sum of US$243,023,089. The proceedings related to the operation of accounts maintained by SH with DB for trading in foreign currencies, shares and financial products. SH bought a counterclaim against DB which was dismissed. The sole director and shareholder of DB, Mr Alexander Vik (“Mr Vik”) gave evidence for SH and was found to have given evidence that was false and supported by partially fabricated documents. The trial judge, Cooke J, described the conduct of SH as “reprehensible”. SH was also ordered to pay 85% of DB’s costs on the indemnity basis. Those costs were said to be roughly £60million.
SH failed to pay the judgment and costs and so DB applied for and obtained a non-party costs order against Mr Vik in the sum of £36,204,891. After a 2 day hearing, Cooke J found that Mr Vik had controlled and funded the litigation. He had stood to benefit personally from it and had such a close connection with SH that it would not be unjust to bind him to the judge’s findings. Mr Vik appealed.
Unfortunately for Mr Vik, the Court of Appeal unanimously dismissed the appeal.
It was not wrong in principle for the court to hold that Mr Vik was bound by the judge’s findings at trial. The procedure was summary in the sense that the decision was based on the facts found by the trial judge. This was in accordance with the judgment in Symphony. That decision emphasised that the court should not make a non-party costs order unless it was just and fair that he should be bound by the evidence given at trial and the judge’s findings of fact. It was critical that the non-party had a close connection to the proceedings. The ordinary rules of evidence did not apply in this type of application. In this case the judge’s findings were not seriously open to challenge. Mr Vik had ample opportunity to contest the issues of fact as he had given evidence, so a summary procedure was not unjust. The funding of the litigation by Mr Vik was just one aspect of the relationship between Mr Vik and SH which justified the conclusion that Mr Vik was the real party to the litigation. DB’s failure to apply for security of costs of the counterclaim did not make it unjust to order costs against Mr Vik. It was not a prerequisite and each case would turn on its own facts. In this case, Mr Vik’s close relationship with SH meant he was not prejudiced by DB’s failure to apply for security of costs.
The Court of Appeal took the view that failure to warn Mr Vik about a possible application for costs against him was not fatal. It was simply a factor to be taken into consideration. The Symphony guidelines were formulated in the context of an application for costs against a non-party whose connections with the proceedings was fairly tenuous. The second and third guidelines were given in that context and not a situation where the non-party was the real party and had ample opportunity to deal with any allegations that might affect his liability for costs before the judge made his findings. The only advantage a warning would have given Mr Vik was an opportunity to consider his own proceedings in relation to the proceedings.
In the Court of Appeal’s view the possibility of making a costs order against a witness should not be excluded though the power was to be exercised with considerable care, as it was an exception to the principle of witness immunity. Such an order was not to be made just because false evidence was given. In this case, the fact Mr Vik’s gave false evidence was no more than one aspect of his efforts to influence the proceedings to give him the best advantage. The order was primarily made because Mr Vik was the real party to the litigation.
The judgment in this matter also contained a postscript from Moore-Bick LJ who gave the judgment. In it he said that it was important to note that the Symphony guidelines were exactly that and not rules. The Dymocks case was a better starting point given that it explains and interprets Symphony in a way that reflects the fact that there will be a variety of circumstances in which the court is likely to be called upon to exercise its discretion. The exercise of discretion must always be just. As it is an exercise of discretion, only limited assistance is likely to be gained from previous first instance decisions.
Directors and other non-parties who unduly influence or benefit from litigation to which they are not a party should take heed of the Court of Appeal’s decision in this and other matters. If it is just to do so, the Court is likely to exercise its discretion. Protesting that an earlier warning was not given may not assist, depending on the factual circumstances of the matter.
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