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Cos I don’t care too much for money? Costs recovery from non-parties to litigation clarified in “The Beatles” documentary case”

  • United Kingdom
  • Commercial litigation
  • Litigation and dispute management
  • Technology, Media and Telecoms

17-09-2018

Case comment: Sony/ATV Music Publishing LLC & Anor v WPMC Ltd & Anor [2018] EWCA Civ 2005

The Court of Appeal has ruled that a High Court decision of Mr Justice Arnold (Arnold J) was wrong to order a non-party costs order (NPCO) against Mr Bailey, the director and majority shareholder of the defendant to Sony’s claim, when he had not been warned that Sony was going to seek one.

The case concerned a documentary about a 1964 concert given by The Beatles. Sony owns the worldwide copyright in eight of the songs performed at the concert. WPMC owned the rights in the video and set about making a documentary.  Sony issued proceedings alleging infringement by WPMC and another of US and UK copyrights.

WPMC’s defences, including “fair use”, failed and Arnold J made various cost orders against WPMC, including an interim payment of £375,000 on account of costs.

Shortly after the costs orders were made, WPMC entered voluntary insolvency. The judgment notes this outcome would not have come as a surprise to Sony. Sony’s solicitors had been told in an email from WPMC that “WPMC has no assets to speak of”. Sony’s solicitors also spelled out in correspondence their lack of conviction that WPMC would be able to meet any costs order.

One year after the judgment was handed down, Sony wrote to David Bailey, the director and majority shareholder of WPMC, intimating for the first time that they intended to seek a costs order against him under Section 51(3) of the Senior Courts Act 1981 that he pay the defendants’ costs.

At first instance, Arnold J made the costs order sought against David Bailey.

The Court of Appeal has overturned that order. The case provides a useful precis of the factors the court will take into account when making a NPCO.

The starting position is Section 51 of the Senior Courts Act 1981. The costs of and incidental to all proceedings in the High Court are in the discretion of the court. The court has the full power to determine by whom and to what extent the costs are to be paid. That includes ordering a non-party to pay costs (Aiden Shipping Co Ltd v Interbulk Ltd [1986] AC 965; [1986] 2 WLR 1051).

In Symphony v Hodgson [1994] QB 179 at 192-193, Balcombe LJ identified a number of material considerations on how the discretion should be conferred. One of which was that the party seeking such an order should:

warn the non-party at the earliest opportunity of the possibility that he may be seeking a costs order against him”.

The main principles were summarised by Lord Brown of Eaton-under-Heywood in Dymocks Franchise Systems (NSW) Pty Ltd v Todd and others [2004]  UKPC 39; [2004] 1 WLR 2807:

  1. The ultimate question in any exceptional case – that is, cases outside the ordinary run of cases where parties pursue or defend claims for their own benefit and at their own expense – is whether it is just in all the circumstances of the case to make such an order;
  2. Generally speaking, the discretion will not be exercised against “pure funders”, i.e. 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. The court’s usual approach is to give priority to the public interest in the funded party getting access to justice.
  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, that non-party will pay the successful party’s costs. In these cases, he is the “real party” to the litigation.

Regarding the need to warn a non-party, Moore-Bick LJ had said this In Deutsche Bank AG v Sebastian Holdings Inc [2016] EWCA Civ 23; [2016] 4 WLR 17:

The importance of a warning will vary from case to case and may depend on the extent to which it would have affected the course of the proceedings. If the third party against whom an order for costs is sought is the real party to the litigation, the absence of a warning may be of little consequence.”

Mr Bailey relied on the failure to warn him. He told the judge that if he had been warned prior to trial that he might face a NPCO, he would have either put WPMC into liquidiation or accepted one of Sony’s offers of settlement.  If he had been warned after trial he would have tried to raise funds to pursue an appeal.

Arnold J concluded that there was no explaining why Sony did not warn Mr Bailey. He noted Mr Bailey’s evidence as to how he would have acted if a warning had been given, and accepted that his evidence had been given honestly. However he pointed out that the evidence had been given “with 20/20 hindsight”, and that he “did not accept that it necessarily reflects how Mr Bailey would actually have acted without the benefit of hindsight”.

Accordingly, and despite Mr Bailey’s evidence to the contrary, Arnold J went on to hold that a warning would not have made a difference.

The Court of Appeal found that Arnold J fell into error on this count. There was no reason to doubt Mr Bailey’s honesty in giving the evidence as to how he would have behaved in the event of a warning. The fact that evidence was given in hindsight, did not necessarily mean it was unreliable. No request had been made by Sony to challenge Mr Bailey’s evidence by cross-examining him. The reasons given by the judge for concluding that the warning would not have made a difference were inferential ones. Mr Bailey was an experienced entrepreneur, used to assessing risk against reward. The judge was not entitled, in the Court of Appeal’s view, to reject Mr Bailey’s evidence as to how he would have behaved in the event of a warning.  It was also fair to take into account the fact that Mr Bailey could have protected his position by ATE insurance. Exercising the discretion afresh, the Court of Appeal noted that Mr Bailey, standing to benefit as he did from the outcome of the litigation was a “real party”, albeit not the only one. However, the absence of any form of warning was “fatal” to the application of the NPCO.

According to the Court of Appeal, it was plain that Sony knew, or should have appreciated that WPMC would not be able to pay Sony’s costs in the event its claim succeeded, and Sony knew that WPMC, and Mr Bailey, with whom they dealt directly were operating on the same assumption. In those circumstances, the failure to warn until a year after judgment was given was manifestly unfair to Mr Bailey. It would be unjust because Mr Bailey was deprived of realistic opportunities to settle the litigation or to protect himself against the adverse effects of a NPCO, or to abandon the defence of the litigation at a much earlier stage.

Learning points

Non-party costs orders are a powerful weapon when dealing with impecunious counterparties to litigation where there is another party who is in fact profiting from the litigation and likely to be the “real party” to it. So as not to be caught out, always make sure that the relevant non-party is warned in good time that they may be pursued for a non-party costs order in the event of success in the claim and inability of the named party in the proceedings to pay.

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