Court decides: non-party parent pays the costs

The courts have jurisdiction to award costs against an entity that is not a party to a proceeding. This jurisdiction will be exercised in exceptional circumstances.

The recent decision of the High Court in Minister of Education v H Construction North Island Ltd(in rec and liq) shows that a parent company cannot hide behind its subsidiary to conduct litigation with immunity from cost consequences.

Key facts

H Construction North Island Ltd, formerly known as Hawkins Construction North Island Ltd (Hawkins) built the Botany Downs Secondary College. The buildings leaked, and the Minister of Education (MoE), amongst others, sued Hawkins.

Hawkins was at the bottom of a chain of companies in which McConnell Ltd (McConnell) was the ultimate parent. Hawkins could not pay its legal fees arising from the dispute.  They were paid by a related company, Hawkins Group Ltd (HGL).  When HGL began falling behind in paying these fees, McConnell guaranteed payment of Hawkins’ litigation costs.

The High Court found Hawkins liable for almost $13.5 million in repair costs. Hawkins was subsequently placed in receivership and later went into voluntary liquidation.

The plaintiffs sought a non-party cost award of $1.485 million against McConnell and its directors.

Legal principles

Costs against non-parties are exceptional. They are awarded only when the non-party has done “something more” that makes the payment just.  The “something more” element is not fixed and may involve, but does not require, impropriety.

Decision

It was common ground that Hawkins faced insolvency. In settlement negotiations, Hawkins stated that there was no commercial rationale for it to pay more than $500,000 to the plaintiffs “having regard to the inevitability of receivership and the associated outcomes should the pending trial determine a material sum owed”. Hawkins also said this figure “will greatly exceed any recoveries that the plaintiffs, as an unsecured creditor, will obtain through the receivership and liquidation of Hawkins”.

When the plaintiffs declined to settle for $500,000, McConnell guaranteed Hawkins’ legal fees and authorised Hawkins to vigorously defend the claim. A four-week trial followed.  Hawkins spent $2.9 million on legal fees and disbursements (including experts).  These were met by HGL.  But for this and McConnell’s guarantee, Hawkins would have been unrepresented at trial.

The Court determined that McConnell exploited Hawkins’ inability to settle at a realistic level while funding a gold-plated defence. This approach to litigation was described as a ‘heads I win, tails you lose’ approach.

The Court held that this approach satisfied the “something more” requirement for a non-party order for costs. It ordered McConnell to pay non-party costs (and disbursements) of $1,100,127.  However, the Court did not determine personal liability against McConnell’s directors.  The directors did not inject any of their own money into Hawkins’ defence and there was no evidence they would benefit personally from eschewing settlement in favour of trial.

Our view

A parent (or its directors) controlling a subsidiary involved in litigation that is insolvent at the time of the litigation (or could become insolvent as a result of it), faces the risk of being seen as controlling the conduct of the litigation.

The critical factor will be the nature and degree of the non-party's connection with the proceedings. If the court is satisfied that the non-party is effectively controlling the litigation, supporting it financially and is doing so with a view to obtaining a benefit of some kind, it may regard the non-party as the real party to the action.  Non-party liability for costs may well follow in these circumstances.

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