Free Riders Forewarned: Legal Costs Exposure for Non-Party Funders in Ireland
The Irish Supreme Court has confirmed in a recent case1 the courts' jurisdiction to make a person who is not a party to proceedings, but who funds and directs the proceedings on behalf of an impecunious corporate plaintiff, and who stands to benefit if the proceedings succeed (the '"Non-Party Funder"), liable for any costs awarded against the plaintiff (the "Funder Costs Order").
The Supreme Court also confirmed the principles to be applied in deciding whether or not to make such a discretionary Funder Costs Order.
The decision arose in the context of a long-running and complex set of proceedings issued between 2003 and 2007 relating to the collapse of the Cunningham Group (the "Group").
In short: the Group and Brian Cunningham, the principal shareholder and director of the Group, alleged that First Active plc ("First Active"), despite providing the initial finance for a property development project, never intended to fully finance the project. They alleged that First Active withdrew financing from the Group mid-development, causing the insolvency of the Group, the appointment of receivers and the calling in of guarantees provided to First Active by Mr Cunningham, and sought various reliefs against First Active as a result.
The cases were case-managed by then High Court Judge (and now Chief Justice) Mr Justice Frank Clarke, and he delivered a number of judgments on various trial-preparation matters. The cases were ultimately heard in 2008 over 66 days. After the Group had finished its evidence, the Group's claim was dismissed on the basis that it had failed to show a prima facie case, and the costs of the proceedings were awarded to First Active.
As the Group was insolvent, and so unable to discharge the costs order, First Active applied to the High Court to make Mr Cunningham personally liable for the costs. Three issues arose for determination: (a) whether the court had jurisdiction to make the Funder Costs Order; (b) if there was such a jurisdiction, the criteria to be applied by the court in determining whether or not to make the order; and (c) whether the criteria were met in this case.
Mr Cunningham resisted the application, arguing there was no jurisdiction to make such an order, and that to make such a finding would constitute judge-made (as opposed to legislature-made) law, would by-pass the existing case law on security for costs, and would adversely impact on the principle of separate corporate personality.
In a 2011 judgment2 the High Court (Clarke J) rejected Mr Cunningham's arguments and found that there was a statutory jurisdiction and a jurisdiction under the Rules of the Superior Courts for a court to make a Funder Costs Order.
Clarke J explained that the ultimate justification for the Funder Costs Order was to redress a potential injustice that could arise where a person pursues litigation largely for their own benefit but with no risk as to costs, by conducting the litigation through a company; it was to prevent non-parties to litigation having a "free ride" in directing actions for their own benefit.
Regarding the criteria to guide the court's discretion whether to make a Funder Costs Order, Clarke J identified the following key factors:
(a) The extent to which it might have been reasonable for the non-party to think that the company could meet any costs if it failed to win the case;
(b) The degree of possible benefit to the non-party concerned; and
(c) Any factors touching on whether the proceedings were pursued reasonably and in a reasonable fashion.
A further factor the High Court considered relevant was whether the Non-Party Funder was on reasonable notice of the fact that the Funder Costs Order might be sought by the defendant.
On the facts, Clarke J made the order against Mr Cunningham. Mr Cunningham then appealed the decision to the Supreme Court.
The Supreme Court confirmed both bases identified by the High Court for the jurisdiction to make the Funder Costs Order.
It also confirmed that the underlying basis for the Funder Costs Order was to prevent an injustice from being done to a party who otherwise could not recover its costs, because a Non-Party Funder had conducted litigation through an insolvent company for its own benefit.
As to how the discretion to make a Funder Costs Order should be exercised, the Supreme Court was at pains to record that it was not setting out a fixed set of factors, and that each case would depend on its own facts. It found, however, that there were certain considerations that a court should have regard to. In addition to the key factors identified by the High Court, the Supreme Court added (on a non-exhaustive basis) the following considerations:
(a) The extent to which the Non-Party Funder was the initiator, funder, and/or controller of, and moving party behind, the proceedings;
(b) There was no requirement of bad faith, impropriety or fraud, though if any of these were present, this would support the making of a Funder Costs Order;
(c) Whether the Non-Party Funder was on notice of the intention to seek a Funder Costs Order, and at which stage of the litigation the notice had been communicated; and
(d) Whether the defendant applied for security for costs in advance of the trial (though this was rarely likely to be decisive in and of itself); and
(e) Ultimately, the Court's discretion is a wide one, but it must be exercised judicially and, in all the circumstances, must give rise to a just result.
On the facts of this case, the Supreme Court was satisfied that all the relevant factors had been taken into account by the High Court and that the Funder Costs Order was just in all of the circumstances.
There are a number of tactical steps available to a defendant facing a claim by an impecunious corporate plaintiff. Security for costs is the first such step usually considered by defendants but the existence of special circumstances – typically an allegation that the defendant caused the plaintiff's impecuniosity, or that the proceedings involve points of exceptional public importance – may mean the application is not pursued or is defeated. In those circumstances, defendants should consider writing to the plaintiff's solicitor asking that they notify any funder of the litigation of the defendant's intention to seek a Funder Costs Order in due course.
Even if security is provided by a plaintiff, it is quantified on the basis of an estimate, and it may be found at the end of the case that the estimate was insufficient to meet the actual costs incurred by a defendant. In those circumstances, it remains open to a successful defendant to apply for a Funder Costs Order.
It should be noted, however, that a Funder Costs Order is not suitable for every case involving an impecunious but unsuccessful corporate plaintiff. An applicant needs to produce evidence of funding, or at least evidence leading to an inference of funding, of the litigation by the non-party. This evidence may be difficult to source, though a separate High Court decision of Clarke J confirmed the jurisdiction of the court to order disclosure of the identity of any Non-Party Funder(s) after judgment3. A further potential limitation concerns the question of whether the proceedings were either unreasonable (i.e. unmeritorious) or were prosecuted in an unreasonable manner: just because a plaintiff failed to win its case does not mean that a Funder Costs Order automatically follows.
This issue is related to, but should not be confused with, the topical question of professional third party funding of litigation, and the continued existence of the common law torts of champerty and maintenance in Ireland. The Non-Party Funder scenario described above does not involve the assignment of a cause of action or an agreement to share the proceeds of the case; rather the corporate entity retains the cause of action, is the proper plaintiff to the case, and the Non-Party Funder has a genuine commercial interest (indirectly, by way of its interest in the plaintiff) that justifies its funding of the case.
Further information can be obtained from the contacts listed below or your usual Maples and Calder contact.
1Moorview Developments Ltd. v. First Active plc  IESC 33
2Moorview Developments Ltd. v. First Active plc  3 IR 615
3Thema International Fund plc v. HSBC Institutional Trust Services (Ireland) Limited  IEHC 357