Weatherford Global Products Ltd v Hydropath Holdings Ltd & Ors

I handed down judgment on liability in this case on 1 August 2014. Judgment was given in favour of the Claimant, Weatherford Global Products Ltd ("Weatherford") and the Fourth to Sixth Parties; essentially, the Defendant, Hydropath Holdings Ltd (“Hydropath”) and the Third Party, Clearwell International Ltd ("Clearwell") lost on all the major issues. For the purposes of this judgment I will not repeat or attempt to summarise the facts as found and they should be taken as read.

On 22 August 2014, I made orders for costs as follows, namely that Hydropath and Clearwell should pay the costs of Weatherford on a standard basis in relation to its Claim against Hydropath and, in relation to the Counterclaim, the costs of both Weatherford and the Fourth to Sixth Parties on an indemnity basis. I ordered that interim payments on account of costs should be made in favour of the Fourth to Six Parties in the sum of £225,000 and of Weatherford in the sum of £750,000, payable within 21 days. Those sums have not been paid.

Weatherford and the Fourth to Sixth Parties applied to join Dr Stefanini as a party to the proceedings for the purposes of seeking a costs order against him personally. Permission was granted. Extensive evidence has been exchanged and I heard Counsel for Weatherford, the Fourth to Sixth Parties and Dr Stefanini for the best part of the day. I am grateful to Counsel for their carefully prepared written submissions and helpful oral argument.

There is no doubt that the Court has jurisdiction to make an order that the costs of any particular piece of litigation should be borne by someone who is not a party to that litigation. Section 51 of the Senior Courts Act 1981 provides as follows:

“(1)

Subject to the provisions of this or any other enactment and to rules of court, the costs of and incidental to all proceedings in—

… (b) the High Court…

shall be in the discretion of the court…

(3)

The court shall have full power to determine by whom and to what extent the costs are to be paid.”

It has been said that costs orders made against non-parties are "exceptional" but in the Privy Council decision in Dymocks Franchise Systems (NSW) Pty Ltd v Todd [2004] UKPC 39, Lord Brown in giving the opinion of the Court said at Paragraph 25 (1):

“Although costs orders against non-parties are to be regarded as "exceptional", 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. The ultimate question in any such "exceptional" case is whether in all the circumstances it is just to make the order. It must be recognised that this is inevitably to some extent a fact-specific jurisdiction and that there will often be a number of different considerations in play, some militating in favour of an order, some against.”

This dictum also contains the overriding requirement which is that the discretion is to be exercised only against a non-party if, when and to the extent that it is just to do so.

There have been a substantial number of cases involving costs orders sought against non-parties but it is clear that the categories of case are neither rigid nor closed. They are, very much, fact sensitive. Balcombe LJ gave a helpful judgement in Symphony Group Plc v Hodgson [1994] QB 179 which may be considered to be germane to the current case; he had regard to various reported decisions where the court had been prepared to order a non-party to pay the costs of proceedings, continuing at Page 191F:

“(1)

Where a person has some management of the action, e.g. a director of an insolvent company, who causes the company improperly to prosecute or defend proceedings…

(2)

Where a person has maintained or financed the action…

(4)

Where the person has caused the action…

I accept that these categories are neither rigid nor closed. They indicate the sorts of connection which have so far led the courts to entertain a claim for costs against a non-party.”

He went on to acknowledge what an appellate judge had said in an earlier case ("There is only one immutable rule in relation to costs, and that is that there are no immutable rules." Per Lloyd LJ – Taylor v Pace Developments Ltd [1991] B.C.C. 406, 408) and continued at Page 192G:

“In my judgment the following are material considerations to be taken into account, although I do not suggest that there may not be others which are relevant.

(1)

An order for the payment of costs by a non-party will always be exceptional…

(2)

It will be even more exceptional for an order for the payment of costs to be made against a non-party, where the applicant has a cause of action against the non-party and could have joined him as a party to the original proceedings…

(3)

Even if the applicant can provide a good reason for not joining the non-party against whom he has a valid cause of action, he should warn the non-party at the earliest opportunity of the possibility that he may seek to apply for costs against him. At the very least this will give the non-party an opportunity to apply to be joined as a party to the action…

(4)

An application for payment of costs by a non-party should normally be determined by the trial judge…

(6)

The procedure for the determination of costs is a summary procedure, not necessarily subject to all the rules that would apply in an action…”

Since a certain amount has been made by Counsel for Dr Stefanini about the failure to warn him before the liability judgement of a possibility that he might be joined to secure a costs order against him personally, it should be noted that Balcombe LJ’s observations about the failure to warn relate to a non-party against whom the Claimant had a valid cause of action; there has been no suggestion that there was any arguable valid cause of action by Weatherford or the Fourth to Sixth Parties against Dr Stefanini.

The Dymocks case also provides highly persuasive advice about how and on what basis costs orders against non-parties can or should be approached. Lord Brown from Paragraph 25, having addressed what "exceptional" meant (see above), continued his summary of the position:

“(2)

Generally speaking the discretion will not be exercised against "pure funders", described in para 40 of Hamilton v Al Fayed (No 2) [2003] QB 1175, 1194 as "those with no personal interest in the litigation, who do not stand to benefit from it, are not funding it as a matter of business, and in no way seek to control its course". In their case the court's usual approach is to give priority to the public interest in the funded party getting access to justice over that of the successful unfunded party recovering his costs and so not having to bear the expense of vindicating his rights.

(3)

Where, however, the non-party not merely funds the proceedings but substantially also controls or at any rate is to benefit from them, justice will ordinarily require that, if the proceedings fail, he will pay the successful party's costs. The non-party in these cases is not so much facilitating access to justice by the party funded as himself gaining access to justice for his own purposes. He himself is "the real party" to the litigation, a concept repeatedly invoked throughout the jurisprudence - see, for example, the judgments of the High Court of Australia in Knight and Millett LJ's judgment in Metalloy Supplies Ltd (in liquidation) v MA (UK) Ltd[1997] 1 WLR 1613…Some reflection of this concept of "the real party" is to be found in CPR 25.13 (1) (f) which allows a security for costs order to be made where "the claimant is acting as a nominal claimant".

(4)

Perhaps the most difficult cases are those in which non-parties fund receivers or liquidators (or, indeed, financially insecure companies generally) in litigation designed to advance the funder's own financial interests…

26.

In a more recent case in the High Court of New Zealand, Arklow Investments Ltd v MacLean (unreported, 19 May 2000), Fisher J said:

"19.

The guiding principle here is that costs orders against third parties are exceptional but that they are warranted in cases where there would otherwise be a situation in which a person could fund litigation in order to pursue his or her own interests and without risk to himself or herself should the proceedings fail or be discontinued.

20…[W]here a person is a major shareholder and dominant director in a company which brings proceedings, that alone will not justify a third party costs order. Something additional is normally warranted as a matter of discretion. The critical element will often be a fresh injection of capital for the known purpose of funding litigation.

21...[T]he overall rationale [is] that it is wrong to allow someone to fund litigation in the hope of gaining a benefit without a corresponding risk that that person will share in the costs of the proceedings if they ultimately fail."

27.

In the High Court of Australia in the Knight case, Mason CJ and Deane J at p 595 said this:

"For our part, we consider it appropriate to recognise a general category of case in which an order for costs should be made against a non-party and which would encompass the case of a receiver of a company who is not a party to the litigation. The category of case consists of circumstances where the party to the litigation is an insolvent person or man of straw, where the non-party has played an active part in the conduct of the litigation and where the non-party, or some person on whose behalf he or she is acting or by whom he or she has been appointed, has an interest in the subject of the litigation. Where the circumstances of a case fall within that category, an order for costs should be made against the non-party if the interests of justice require that it be made."

28.

The final judgment from which their Lordships would cite in this connection is that of Millett LJ in Metalloy Supplies already referred to, at p 424-425:

"[An order] may be made in a wide variety of circumstances where the third party is considered to be the real party interested in the outcome of the suit...It is not, however, sufficient to render a director liable for costs that he was a director of the company and caused it to bring or defend proceedings which he funded and which ultimately failed. Where such proceedings are brought bona fide and for the benefit of the company, the company is the real plaintiff. If in such a case an order for costs could be made against a director in the absence of some impropriety or bad faith on his part, the doctrine of the separate liability of the company would be eroded and the principle that such orders should be exceptional would be nullified.

The position of a liquidator is a fortiori. Where a limited company is in insolvent liquidation, the liquidator is under a statutory duty to collect in its assets. This may require him to bring proceedings. ... If he brings the proceedings in the name of the company, the company is the real plaintiff and he is not. He is under no obligation to the defendant to protect his interests by ensuring that he has sufficient funds in hand to pay their costs as well as his own if the proceedings fail."

29.

In the light of these authorities their Lordships would hold that, generally speaking, where a non-party promotes and funds proceedings by an insolvent company solely or substantially for his own financial benefit, he should be liable for the costs if his claim or defence or appeal fails. As explained in the cases, however, that is not to say that orders will invariably be made in such cases, particularly, say, where the non-party is himself a director or liquidator who can realistically be regarded as acting rather in the interests of the company (and more especially its shareholders and creditors) than in his own interests.”

Lord Brown confirmed at Paragraph 33 that the "pursuit of speculative litigation" may in itself support in making of a costs order against a non-party.

Mr Justice Lewison (as he was then) sitting in the Court of Appeal in Systemcare (UK) Ltd v Services Design Technology Ltd and Sharif [2011] EWCA Civ 546 made some useful further comments referring to the decisions in Symphony Group and Dymocks amongst others:

The same judge had to address another non-party costs order case in Threlfall v ECD Insight Ltd [2013] EWCA Civ 1444. He said at Paragraph 13:

“If a non-party costs order is made against a company director, it is quite wrong to characterise it as piercing or lifting the corporate veil; or to say that the company and the director are one and the same. As Mr Shaw has demonstrated, the separate personality of a corporation, even a single-member corporation, is deeply embedded in our law. But its purpose is to deal with legal rights and obligations. By contrast, the exercise of discretion to make a non-party costs order leaves rights and obligations where they are. The very fact that the making of such an order is discretionary demonstrates that the question is not one of rights and obligations of a non-party, for no obligations exist unless and until the court exercises its discretion. Moreover the fact that the discretion, if exercised, is exercised against a non-party underlines the proposition that the non-party has no substantive liability in respect of the cause of action in question. Of course, it is not enough merely to say that Mr Whitney was a director of ECD, but in deciding whether or not to make such an order, the court is not fettered by the legal realities. It is entitled to look to the economic realities. It is in this sense that many of the cases pose the question whether the non-party is "the real party" in the case. In the present case, (1) Mr Whitney is the sole shareholder in ECD and is therefore entitled to all its economic benefits; (2) Mr Whitney is the sole director of ECD and makes all decisions on its behalf; (3) ECD was under Mr Whitney's absolute control and he ran it without regarding himself as accountable to anyone else; (4) the variation of the contract under which Mr Threlfall's entitlement arises was, on the judge's finding, made by Mr Whitney not only in his capacity as managing director, but also in his capacity as sole shareholder; (5) Mr Whitney sought to resile from that contract because it was so damaging to his own financial interests as well as the company's. The judge's phrase "sought to resile" suggests knowing resiling from that contract; (6) the failed counterclaim would also have been to Mr Whitney's financial benefit had it succeeded, because it would have paved the way for the argument that Mr Threlfall had forfeited his entitlement to the claimed share of equity; (7) the result of Mr Threlfall's success was that Mr Whitney would either be deprived of part of the value of his own shareholding or his entitlement by way of dividend to the payment in lieu, and thus Mr Whitney can be seen to have defended his own position in resisting the dilution of his own shareholding; (8) it is usually a matter of indifference to a corporation who its shareholders are, and consequently a battle over shareholdings is in reality a battle between shareholders; (9) Mr Whitney gave evidence in support of ECD's defence, and his evidence was in part rejected and in part found not to be credible. It is quite clear, as Mr Freedman demonstrated, that on analysis this section of Mr Whitney's evidence was given in bad faith; (10) Unlike most cases of non-party costs order Mr Whitney was in fact a party and as such entitled to participate in the trial to the fullest extent possible; and (11) Mr Whitney caused the company to advance a false defence which he must have known was false.”

Substantial reliance was placed by Mr Sachdeva for Dr Stefanini on the need for a timely warning to be given to the non-party, it being suggested that it was either a pre-requisite for an order to be made against the non-party or a factor which had to be applied by the Court at least in reducing in percentage terms any costs order which might be made. I do not accept that the failure to warn can or should necessarily have those consequences, albeit it is undoubtedly a material factor for the Court to take into account, to be given more or less weight as the case may demand. Reliance was placed on the Court Appeal decision in Myatt v National Coal Board [2007] EWCA Civ 307 which involved an appeal by claimants who had secured conditional fee agreements with their solicitors; the cases involving hearing loss by former coalminers having been settled, the costs judge found that the CFAs were unenforceable thus rendering the After the Event legal expenses insurance invalid. The claimants appealed, it being fairly clear that it was the solicitors who had the primary interest in promoting the appeal; the defendant had failed to warn the claimants’ solicitors that they would seek an order for costs against them personally. Dyson LJ (as he then was) accepted that the Court had jurisdiction to order costs against the solicitors, and indeed he made an order against them. He said at Paragraphs 12 to 15:

I do not consider that this case necessarily lays down any fixed and binding requirement that a court on a non-party costs order application must always or invariably disallow or reduce any costs order that might otherwise have been made where the non-party has not been warned beforehand that such an application might be made. There was for instance in the Myatt case no hint or suggestion of impropriety or the pursuit of a speculative appeal.

I set out below a brief chronology:

The Court has received extensive evidence in the form of witness statements from solicitors for Weatherford and the Fourth to Sixth Parties as well as from Dr and Mrs Stefanini. Although there are some differences between the respective applicants and Dr Stefanini, a number of these depend upon inferences which might be drawn from basic facts. Allowing for the fact that this procedure is necessarily a summary one, I have formed the clearest view on the facts that Dr Stefanini was at all material times both before and during the litigation the person who in reality controlled both Hydropath and Clearwell. I found, at Paragraph 15 of my main judgement that he has was "the controlling mind of both companies". Dr Stefanini himself said in his first lengthy witness statement that "Hydropath was my company and the company through which all my various patents were held and exploited" and that Clearwell was incorporated to ensure that Hydropath was kept entirely his. He and his wife have been sole directors of Hydropath since 2003 and he is the principal shareholder with the remaining shares distributed amongst his wife and two daughters. He has been the sole director of Clearwell since January 2011. The disclosed Hydropath accounts from 2007 to 2010 state that the company was "controlled by Mr D. Stefanini”; although this remark is not repeated in the accounts from 2011 to 2013, there is no reason to believe that the company did not continue to be controlled by him and, indeed, the evidence suggests that it was. There has been no hint in the evidence either at the trial or on this application that any executive decision (such as the decision to have Messrs Clark and Lauretti dismissed as directors or to pursue the Counterclaim against them and Weatherford) was made by anyone other than Dr Stefanini. It is an overwhelming inference and, indeed, it is not challenged, that the Schedule of Confidential Information which underpinned a major part of the Counterclaim was prepared by or under the direction of Dr Stefanini.

There was unchallenged evidence that Hydropath did employ others, such as Dr Rodrigues, and that at least he did some work in connection with the case and indeed particularly in connection with the efforts to persuade Intertek to re-certify over a period of over a period three years. It is also the case that Mrs Stefanini is likely to have handled the accounting side of the business in terms of receiving and making payments due to and from Hydropath. There is however little or nothing to suggest that these services involved or amounted to executive or overall control by either of them of Hydropath.

It is also the case on the evidence that Hydropath and Clearwell were funded effectively by Dr Stefanini in connection with the litigation in substantial part. There was the direct funding since March 2014 but in addition there was the declaration of dividends of £800,000 but retention by way of loan by Hydropath once litigation was contemplated and being pursued from 2011 onwards. This was clearly left in so that the litigation could be funded. Thus over £1m of was paid into or retained within Hydropath to fund the defence of the proceedings and the counterclaim; this was largely Dr Stefanini’s money or financial entitlement, albeit some was possibly separately Mrs Stefanini’s or their daughters; the evidence suggests that the £800,000 loan was reduced to £526,957 by April 2013 and by a further £118,341 by April 2014. Dr Stefanini’s evidence on these applications suggests that total costs paid in relation to the current litigation were some £1.33m. Thus, broadly half of this litigation has clearly been funded primarily by or for the benefit of Dr Stefanini. Without this support, Hydropath was technically insolvent; Clearwell, it is accepted, was in such financial difficulty that without the support of Hydropath (offered on the security of costs application) it would have been considered insolvent. The relatively recent appointment of an administrator to Hydropath (unfortunately and surprisingly not mentioned by Dr Stefanini in his first witness statement) underlines the financial difficulties.

It can be said that the litigation was “caused” largely by Dr Stefanini in that he invented and marketed for the oil industry the Clearwell product which he knew had a propensity to spark in foreseeable circumstances; he knew about this when obtaining certification for the basic product in 2003 and when it was re-certified in 2005 at the time of the agreements with Weatherford. When sparking was reported in March 2008 by Weatherford’s customer, Henry Oil, his repeated reaction was that the sparking was not incendive. When presented with Mr Hadi’s calculations in March 2010 which demonstrated that the sparking could be incendive, he countered with calculations which were so wrong that even his own expert, Mr Thompson said an engineer “should have been ashamed of” them. A few months later he effectively and disingenuously concealed from Weatherford and indeed his then co-directors the critical fact that Intertek suspended certification of the Clearwell Product and had concluded that the installed products should be recalled. He simply was not prepared to engage constructively at any time with Weatherford about the sparking problem; he disengaged Messrs Clark and Lauretti under a misguided inference that they had become improperly close to Weatherford, when in reality they were trying to engage with Weatherford to overcome the sparking problem. Hydropath and Clearwell seem to have engaged experts in the case late, that is late 2013 or early 2014 so that the decisions as to how to frame the Defence and the Counterclaim were those of Dr Stefanini.

However, I was clear in my judgment that in relation to Dr Stefanini, although he was a “most unsatisfactory witness”, I was not satisfied that he was “consciously dishonest” (Paragraph 18(a)(i)); although this was not a positive endorsement of his honesty, he had convinced himself that his product was safe and that everyone else was wrong. In my judgment on costs, I could not say it was “unreasonable for the Defendant to defend the proceedings and in particular for Dr Stefanini as the director and primary shareholder to seek to defend the efficacy, usability, effectiveness and safety of his product” and indemnity costs were not ordered in relation to the defence of the claim by Weatherford. There is no good reason to resile from that view.

The same could not be said of the Counterclaim which was at best speculative in all material respects or at least those which must have involved the vast majority of the costs associated with the Counterclaim:

In respect of the other relatively minor complaint (namely the use of the Clearwell name for the Clearwell R Product), although these were arguable complaints, they did not materially impact on the costs or the length of the trial.

Hydropath, for the purposes of the current costs applications, has waived privilege on a written Advice prepared by its trial Counsel, Michael Booth QC, in order to support an argument that Dr Stefanini acted reasonably because he relied upon the advice of his legal team in pursuing both the defence of the Weatherford proceedings and the Counterclaim. This Advice, issued in May 2014 and running to 24 pages, reads very much like an Advice on Evidence, rather than an advice on the merits or on the likely outcome. An Appendix 6 which apparently addresses "legal details” (e.g. Paragraph 6) has not been disclosed. Counsel was obviously concerned as to whether and the extent to which Dr Stefanini was likely to be viewed as a credible witness by the Court, this concern reflecting Sir Raymond Jack’s views about him in the earlier proceedings. For instance, he recognised that the other parties would regard Dr Stefanini as the "potential weak point in our case" (Paragraph 4). Counsel advises that Dr Stefanini answers the questions and prepares thoroughly to obtain a good grasp of the issues. Four pages of the Advice go to what some of the pleaded issues are. He expresses some views about some of the legal issues such as whether the agreements have to be construed as "being part of a suite of agreements which cross refer to one another" (Paragraph 44.2). He does not express a view as to whether there will be a finding that the Clearwell Product was safe, albeit he suggests that there are still "obviously various grounds of defence even if the products were shown to be unsafe" (Paragraph 46); however he underlines difficulties experienced with Mr Senior, Hydropath’s expert on safety, albeit that at Paragraph 47 he says that the “case does not become hopeless if Mr Senior does: it does become hopeless if Dr Stefanini is hopeless and loses focus". Paragraph 48 goes on to address how it might be shown that Weatherford and Messrs Clark’s and Lauretti’s about safety were specious albeit it accepts that obviously "it is going to be a lot harder to show that this was all a plot if the court is convinced there was always a genuine safety issue”. Paragraph 49 goes on:

“If we can show that what happened was driven by Clark and Lauretti running their own competition agenda rather than safety concerns that will be hugely beneficial. It seems to me that there [sic] excuses are specious and the likelihood is (and the court ought to find" that they were deliberately acting in breach of duty to pursue their own interest. This also impacts upon the conduct of Weatherford if we manage to establish it. Needless to say it will require a headlong assault on all of their witnesses."

Counsel at Paragraph 61 says this:

“I know that Dr Stefanini and Dr Rodrigues are both very busy men but attention to these matters is critical. The credibility cogency and reliability of that evidence is key to the case. Therefore, having considered this advice, they need to consider matters in more detail in the way referred to herein. Although obviously we want the expert evidence to be as cogent as possible, even if it is not what we were expecting this case is plainly winnable as long as our witnesses are sufficiently prepared to make their evidence compelling. It is vital that this is attended to."

This suggests that at this late stage matters were at least not yet in a state in which Dr Stefanini could be confident success could be assured.

Having regard to the legal authorities, and in particular those referred to above, I consider that the following factors can and indeed should be taken into account:

Taking all these factors into account, I have formed the very clear view that it is just and fair that Dr Stefanini personally pays the costs of Weatherford, MSL and Messrs Clark and Lauretti of and occasioned by the counterclaims. I have already decided that Hydropath and Clearwell are required to pay these costs on an indemnity basis.

The application of MSL and Messrs Clark and Lauretti that Dr Stefanini pays their costs, which arose effectively as Defendants to the Counterclaim, is allowed. The application of Weatherford that Dr Stefanini pays its costs is allowed to the extent that it incurred costs arising out of and in connection with the defence of the Counterclaim. For the avoidance of doubt, no order is to be made against Dr Stefanini personally for Weatherford’s costs of its pursuing its Claim against Hydropath.