Case law: Court clarifies when companies in same group as losing litigant can be liable for other side’s legal costs

Group companies in legal disputes will welcome clarification on whether, and which, companies in the same group may be liable to contribute to the other side's legal costs if the case is lost.

A non-trading (ie dormant) company took several other businesses to court. The dormant company was part of a group of companies, and the action was funded by one of its shareholders - another company in the group - by way of a loan.

The dormant company lost, and the court ordered it to pay the other side's legal costs. However, it was insolvent and could not pay. One of the defendants argued that the group company funding the claim should pay its costs. It also argued that another company in the group (which had not been involved in the court action) was liable for its legal costs too.

The High Court ruled that the company funding the claim should pay the business's legal costs, because it was a real party to the litigation. It said that it would be wrong for a funder who would benefit if the court case was won to be protected against the risk of having to pay the other side's costs if the case was lost.

However, the Court found that the other group company was not liable because:

  • It was neither funding the court action nor controlling how it was conducted
  • If the case had been won, the other group company would have had no say in what happened to the damages recovered. Any benefit it received would have been incidental rather than direct
  • The fact the other company was in the same group did not, in itself, make it liable to pay the other side's legal costs
  • Court rules list the third-party entities who can be made liable for the other side's costs in a court case. They do not include the shareholders of a company bringing a legal claim, or other companies in the same group

The ruling makes clear that other group companies can be liable for the other side's costs in a legal dispute bought by a fellow group company only if they will benefit from, and have control of, the claim.

Operative date

  • Now

Recommendation

  • Group companies in legal disputes should consider whether, and which, other companies in the group may have to contribute to the other side's legal costs if the case is lost

Case law: Montpelier Business Reorganisation Ltd v Armitage Jones LLP [2017] EWHC 2273

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