A High Court judge was wrong to order a non-party costs order (NPCO) where the respondent had not been warned that the applicant was going to seek one, the Court of Appeal has ruled.
Lord Justice Floyd found that that the judge had been wrong to disregard the respondent’s submission that he would have acted differently had he received such a warning.
Sony/ATV Music Publishing LLC & Anor v WPMC Ltd & Anor  EWCA Civ 2005 concerned a claim of copyright infringement in a documentary about a 1964 concert given by The Beatles.
The claimants were successful at trial before Mr Justice Arnold and ordered WPMC to pay SATV’s costs, on the indemnity basis after the date when a rejected part 36 offer had expired.
It was clear to the claimants before the trial that WPMC could not pay any costs order, and that its only apparent asset was its rights in the documentary.
Just over a year after judgment had been handed down, SATV wrote to David Bailey, the director and majority shareholder of WPMC, so say that it intended to seek an NPCO against him under section 51(3) of the Senior Courts Act 1981.
Amongst his reasons for defending the application was that he had not been warned at any stage up to then that this was a step which SATV intended to take in the event it succeeded in the action.
Mr Bailey told the judge that, had he been given such a warning prior to trial, he would either have put WPMC into liquidation or accepted one of SATV’s settlement offers.
Further, he said that, if he had been warned after the trial, he would have tried to raise funds to pursue the appeal on the one issue for which permission had been granted.
Arnold J concluded that there was no explanation of why SATV did not warn Mr Bailey. While the judge accepted that his evidence had been given honestly, he also said it been given “with 20/20 hindsight”, and that he “did not accept that it necessarily reflects how Mr Bailey would actually have acted”.
As a result, the judge went on to hold that a warning would not have made any difference.
On appeal, Lord Justice Floyd said Arnold J fell into error. “He left out of account a feature which he should have considered, namely the prospect that Mr Bailey would have conducted the defence of the case differently if a warning had been given.”
The fact that evidence was given with hindsight, as often happened, did not necessarily mean that it was not reliable, Floyd LJ said.
“Mr Bailey had given evidence in the clearest possible terms as to how he would have behaved if he had known that he was running the risk of a NPCO. No request had been made to challenge this evidence by applying to cross-examine him.”
He also found that the reasons given by the judge for concluding that the warning would not have caused Mr Bailey to act differently were “inferential ones”, namely that Mr Bailey was motivated by recouping money for his fellow investors, by the advice he had received from his lawyers and by the fact that they were prepared to act on a conditional fee agreement.
“Those factors do not mandate a conclusion that Mr Bailey would have acted in the same way if he had known that he would face a costs bill for several hundreds of thousands of pounds.
“It is one thing to help out fellow investors if there is no appreciable downside, quite another if it is to going to result in a large costs liability if the defence is unsuccessful.”
Mr Bailey, Floyd LJ said, was an experienced entrepreneur, used to assessing risk against reward. “The judge was not entitled, in my judgment, to reject Mr Bailey’s evidence as to how he would have behaved in the event of a warning.”
He added: “I also consider that it is fair to take into account the fact that Mr Bailey could have protected his position by ATE [after-the-event] insurance.
“The judge rejected this point because there was no evidence that Mr Bailey asked for or was given advice about the remedies which were open to SATV if no ATE cover was obtained and WPMC lost.
“However, it was obvious that Mr Bailey and SATV were operating on the assumption that any costs order made against WPMC would not be met. It is not clear to me therefore what should have prompted Mr Bailey to ask for such advice.
“However, if he had been warned that a NPCO was being sought against him, there was every reason for him to ask for and obtain appropriate advice as to how he might protect himself against such an order.”
Exercising the discretion afresh, Floyd LJ described the absence of any form of warning as “fatal” to the application for the NPCO.
“It is plain, as the judge indeed held, that SATV knew or should have appreciated that WPMC would not be able to pay their costs in the event that the claim succeeded, and they 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 final judgment is given strikes me as 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.
“I would therefore allow the appeal and set aside the NPCO.”