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Non-Party Costs Orders and Service Out of the Jurisdiction

10 July 2013

In the recent judgment in CIGNA Worldwide Insurance Company ("CIGNA WW") (by and through its court-appointed receiver, Josie Senesie, and in respect of the assets undertaking and affairs of its licensed Liberian branch and business) v ACE Limited ("ACE"), (Unreported, 13 May 2013), the Grand Court considered the circumstances in which an interlocutory summons may be served out of the jurisdiction with the aim of securing orders that a non-party pay the applicant's costs otherwise incurred in the proceedings.

Orders that a non-party pay the costs incurred by a party to proceedings most commonly arise in the context of orders against non-parties who have funded or otherwise controlled an unsuccessful litigant's claim or defence.  Professional litigation funding arrangements are increasingly common and can provide financial support for claims, usually on terms that if the claim succeeds the claimant will repay the funder's funding plus a percentage of the sums recovered or an uplift on the amount of funding, but nothing if the claim fails.  

In costs-shifting jurisdictions (such as the Cayman Islands and other English-based systems), a plaintiff who needs funding to pursue his claim will usually obtain after-the-event insurance ("ATE insurance") to enable him to be able to pay any adverse costs order made in favour of the defendant.  However, if a successful defendant is unable to enforce the adverse costs order against the plaintiff (either because he has no assets or ATE insurance, or because it is impossible to enforce the costs order in the jurisdiction where he may have assets), then the defendant may seek to obtain a non-party costs order against those who have financed the plaintiff's unsuccessful litigation.

Non-Party Costs Orders

Section 24(3) of the Judicature Law (2007 Revision) permits the Cayman Islands court, in appropriate circumstances, to make non-party costs orders.  In Dymocks Franchise Systems (NSW) Pty Ltd v Todd, [2004] 1 WLR 2807, the Privy Council set out the general principles as to when non-party costs orders may be granted.  Although non-party costs orders 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 for the court is whether in all the circumstances it is just to make the order.

In general, non-party costs orders will not be awarded against "pure funders" who have 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.  Thus, the English court did not make the many private citizens who funded Neil Hamilton MP's unsuccessful libel action against Mohamed Al Fayed liable for Mr Al Fayed's costs (Hamilton v Al Fayed (No 2) [2003] QB 1175).

The Privy Council held in Dymocks that, where a non-party not only 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 such cases is not so much facilitating access to justice by the party funded as gaining access to justice for his own purposes.  In that way he is "the real party" to the litigation, and it would therefore be appropriate for the court to exercise its discretion to make a non-party costs order against him.

In CIGNA v ACE Limited the non-parties were based outside the jurisdiction, and Cresswell J was asked to decide if the Grand Court has jurisdiction to permit service of a summons for a non-party costs order against them.  In the event, he decided that the Grand Court does, in fact, have jurisdiction.

CIGNA v ACE Limited

The facts were as follows.  The Commissioner for Insurance of Liberia (the "Commissioner") purported to act as receiver over what he alleged was the Liberian branch and business of CIGNA WW, a well-known insurance company incorporated in Delaware.  In July 2008 the Commissioner issued proceedings in the Grand Court against ACE, another well-known insurance company, in respect of alleged claims arising in Liberia.  In April 2012 the Grand Court struck out the Commissioner's claims and awarded ACE its costs.

The only asset of the purported branch of CIGNA WW was its purported claim against ACE.  The Commissioner had no assets in the Cayman Islands.  To the extent that he had available assets in Liberia those assets were, as a matter of Liberian law, unavailable to ACE.

ACE alleged that: the Commissioner was merely a nominal plaintiff; certain entities and individuals (the "Costs Parties"), all incorporated or resident outside of the Cayman Islands, had controlled and funded the proceedings; they had done so in the expectation of gain based on a share of any recovery; and the proceedings had been conducted negligently, unreasonably and improperly.  ACE issued a summons (the "Costs Summons") seeking orders that the Costs Parties be joined as parties to the proceedings for the purposes of paying, jointly and severally, on the indemnity basis ACE's costs of defending the proceedings.  

Service Out of the Jurisdiction

At an ex parte hearing the court granted ACE permission for leave to serve the Costs Summons on the Costs Parties.  In April 2012 two of the Costs Parties (Mr Kenney, an attorney in the British Virgin Islands, and CC International Limited ("CCI"), a Nevis company) applied to set aside the order granting leave to serve the Costs Summons out of the jurisdiction.  In a judgment dated 13 May 2013, Cresswell J rejected their application.

Cresswell J was referred in particular to two English cases: a decision of the Court of Appeal (Ikarian Reefer (No 2) [2000] 1 WLR 603), and one of the House of Lords (Masri v Consolidated Contractors International (UK) Ltd and others (No 4) [2009] UKHL 43).

In the Ikarian Reefer (No 2), the Court of Appeal held that where it was alleged that a non-party domiciled outside the jurisdiction was the alter ego of a party to civil proceedings pending in the English court, the English court had jurisdiction under section 51 of the Supreme Court Act 1981 (equivalent to section 24(3) of the Judicature Law) to decide whether that non-party had such a connection with the proceedings that he should pay the costs.  Waller LJ commented that the appropriate course procedurally under "the old rules" (which are equivalent to those in current use in the Cayman Islands) was to issue a summons in the action and seek leave from the court to serve it on the non-party outside the jurisdiction.  

Mr Kenney and CCI pointed out that Lord Mance in Masri had considered the Ikarian Reefer (No 2) as a "special case", since the non-party in those proceedings had been the alter ego of the plaintiff company whose proceedings he had instigated, controlled and financed.  As Mance LJ put it (at 33): 

"In such circumstances it may be legitimate to assimilate the party and non-party, and to treat any means of service available against the former as available also against the latter."

Mr Kenney and CCI argued that it was only in such circumstances where the non-party was the alter ego of the plaintiff that the court then had jurisdiction to decide whether it was legitimate to assimilate the party and the non-party so that service could be effected on either in the same way.  ACE's position was that Masri is not authority for the proposition that leave to serve out of the jurisdiction on a non-party for a costs order is allowed if, and only if, the non-party is the alter ego of the actual party.  It would be an unjust result if a non-party within the jurisdiction were liable for costs under the wide ambit of Dymocks, but a non-party outside the jurisdiction who had conducted himself in precisely the same way would escape liability because the applicant was unable to show that he was the alter ego of the plaintiff.

Judgment

Cresswell J analysed the position as follows:

(a) The jurisdiction to make a non-party costs order under section 24 of the Judicature Law is as set out in Dymocks.

(b) The correct procedure where a plaintiff or defendant seeks a non-party costs order is to issue a summons in the action for an order pursuant to section 24 of the Judicature Law that the non-party pay the costs and to apply to add the non-party as a party to the proceedings for the purposes of costs only.

(c) As on any application for permission to serve proceedings on a person out of the jurisdiction, the applicant must satisfy the three well-established requirements set out in Seaconsar Far East Ltd v Bank Markazi Jomhouri Islami Iran [1994] 1 AC 438:

(i) in relation to the foreign defendant there is a serious issue to be tried on the merits, i.e. a substantial question of fact or law, or both, in which there is a real (as opposed to fanciful) prospect of success;

(ii) there is a good arguable case (a much better argument) that the claim falls within one or more classes of case in which permission to serve out may be given; and

(iii) in all the circumstances the Cayman Islands is clearly or distinctly the appropriate forum for the trial of the dispute.  

In relation to the first requirement, Cresswell J held that there was a serious issue to be tried as to whether a non-party costs order should be made against both Mr Kenney and CCI, with a real prospect of success, on the basis inter alia that there was evidence before the court that the plaintiff was a nominal plaintiff, and that there were serious issues to be tried as to whether Mr Kenney and CCI's funding and control of the proceedings were as had been alleged by ACE.

In relation to the second requirement, he considered the English decision in The Ikarian Reefer (No 2), a decision confirming that the English court had jurisdiction to permit service of a costs summons out of the jurisdiction pursuant to the former Rules of the Supreme Court.  He held that Order 11, Rule 9(2) of the Grand Court Rules afforded the court with the necessary jurisdiction in this case.  In doing so, he considered the impact on The Ikarian Reefer (No 2) of the subsequent decision of the House of Lords in Masri, which was a case concerning the English court's jurisdiction to permit service out of the jurisdiction of an application to examine a director of a company as to the extent of its assets where the director was resident out of the jurisdiction.    

Cresswell J concluded that:

"The principle underlying the jurisdiction … under GCR O.11, r. 9(2) to be derived from Masri is that where a person (B) instigates, controls and finances proceedings brought in the name of A, there may be circumstances in which it is legitimate to assimilate the party A and the non-party B, and to treat any means of service available against A, as available also against B.  This is so where B in reality brought the main proceedings and there has in effect been a submission to the jurisdiction by B … Although the expression alter ego may be used to describe B's relationship with A, I do not read Lord Mance in Masri as confining the use of GCR O.11, r. 9(2) to the alter ego ... Lord Mance plainly regarded the type of case that would fall within the principle as narrow, but he was not concerned in Masri to examine the extent of the circumstances in which it might be legitimate to assimilate the party A and the non-party B…"

On the facts, Cresswell J held that there was a good arguable case that:

(a) Mr Kenney and CCI instigated, controlled and financed the proceedings and that the circumstances are such that it was legitimate to assimilate Mr Kenney and CCI with the plaintiff and to treat any means of service available against the plaintiff as also available against Mr Kenney and CCI;

(b) Mr Kenney and CCI in reality brought the proceedings and there had in effect been a submission to the jurisdiction by Mr Kenney and CCI; and

(c) if it was necessary to establish that Mr Kenney and CCI were the alter ego of the plaintiff, the concept of alter ego was met because the plaintiff was a nominal plaintiff.

As to the third requirement, Cresswell J held that it was beyond doubt that the Cayman Islands was clearly and distinctly the appropriate forum.  

Conclusion

Most commercial funders of litigation understand that if they are assisting a plaintiff in a costs-shifting jurisdiction they should ensure that either the plaintiff has means of satisfying an adverse costs order (through ATE insurance or otherwise) or be prepared for the successful party to seek non-party costs orders against them, wherever they may be incorporated or resident.


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