Understanding Non-Party Costs Orders

When a legal dispute ends, the question of who pays the legal costs is paramount. Typically, the losing party foots the bill for the winner’s reasonable costs. But what happens if the losing party can’t pay, perhaps due to insolvency? Or what if someone else was secretly pulling the strings or stood to gain the most from the litigation? This is where the powerful, and sometimes surprising, tool of a Non-Party Costs Order (NPCO) comes into play in UK civil litigation.

What Exactly is a Non-Party Costs Order (NPCO)?

An NPCO is an order made by a court in England and Wales that requires someone not formally a claimant or defendant in a lawsuit to pay some or all of the legal costs incurred by one of the actual parties. This power is a significant exception to the general rule that only the named parties are responsible for costs. 

• • • The losing party is a “man of straw” (unable to pay), and another individual or entity was the true instigator or beneficiary of the failed litigation. 
    • Individuals might try to use a company’s separate legal personality (the “corporate veil”) to engage in litigation without personal risk, especially if the company is under-resourced. 

The possibility of an NPCO also acts as a deterrent against frivolous claims or the improper use of corporate structures to avoid costs.

The Legal Foundations: Where Does This Power Come From?

The court’s authority to make NPCOs isn’t arbitrary. It’s primarily derived from:

1. Section 51 of the Senior Courts Act 1981: This is the main statutory source, granting courts broad discretion over who pays legal costs and to what extent. The crucial part, Section 51(3), states the court has “full power to determine by whom and to what extent the costs are to be paid.“
2. Civil Procedure Rule (CPR) 46.2: This rule sets out the essential procedural steps. It ensures fairness by requiring that the non-party:

• •  Is formally added to the proceedings for costs purposes only. 
  • Is given a reasonable opportunity to attend a hearing and make their case.

When Can a Court Make an NPCO? Key Principles

The court’s decision to issue an NPCO is highly discretionary and fact-specific. However, several core principles, largely developed through case law, guide this discretion:

• • • The Overarching Test: Is it “Just”? This is the single most important principle. The court will only make an NPCO if it is “just” to do so in all the circumstances of the case. What is considered just can evolve and depends heavily on the specific facts. 
    • “Exceptional” Circumstances: NPCOs are described as “exceptional.” This doesn’t mean they are incredibly rare, but rather that the case falls “outside the ordinary run of cases where parties pursue or defend claims for their own benefit and at their own expense.” This was clarified in the influential case of Dymocks Franchise Systems (NSW) Pty Ltd v Todd.
    • Identifying the “Real Party”: A crucial factor is whether the non-party was, in substance, the “real party” to the litigation – the one truly controlling it, funding it for their own ends, or standing to be the main beneficiary.
    • The Triad: Funding, Control, and Benefit: Courts closely examine the extent to which the non-party:
      • Funded the litigation.
      • Controlled its conduct.
      • Stood to benefit from its outcome. “Pure funders” (those with no personal interest, control, or benefit beyond perhaps a standard commercial loan return) are generally protected, as affirmed in Dymocks. However, if funding is combined with significant control or benefit, an NPCO becomes more likely. 
    • Causation: There generally needs to be a link between the non-party’s actions and the costs being claimed. The case of Jobanputra v Modi highlighted causation as a “vital factor.” 
    • Impropriety or Bad Faith: While not always essential, if a non-party has acted improperly or in bad faith (e.g., pursuing a knowingly false claim), this can heavily influence the court’s decision to make an NPCO.

Who Can Be Targeted by an NPCO?

Several categories of non-parties frequently find themselves facing NPCO applications:

• • • Company Directors (especially of insolvent companies): This is a common scenario. If a director uses an insolvent company to litigate for their personal benefit (rather than the company’s genuine benefit), or acts with serious impropriety, they risk an NPCO. The Court of Appeal in Goknur Gida v Aytacli provided key guidance, stating that “something more” than just being a director is needed if the litigation was for the company’s benefit. This “something more” is often personal gain or serious misconduct. 
    • Litigation Funders: The landscape for commercial litigation funders has evolved significantly. The “Arkin cap” (which suggested a funder’s liability was limited to their investment amount) is no longer a strict rule, following cases like Davey v Money. Courts now have broader discretion, and funders who actively control or stand to gain substantially from litigation may face uncapped NPCOs. The recent Supreme Court decision in PACCAR has also introduced new complexities regarding the enforceability of some litigation funding agreements, though its direct impact on NPCO principles is still unfolding.
    • Insurers: The Supreme Court in Travelers Insurance Company Ltd v XYZ clarified the position for insurers. An insurer won’t typically face an NPCO just for funding its insured’s defence. Liability usually arises if the insurer becomes the “real defendant” or “unjustifiably intermeddles” in the litigation, causing costs. 
    • Credit Hire Organisations (CHOs): Insurers increasingly seek NPCOs against CHOs, especially where the claimant has Qualified One-Way Costs Shifting (QOCS) protection. The courts will look at the CHO’s financial benefit and control over the claim. 
    • Liquidators: A high threshold of impropriety or bad faith is generally required for an NPCO against a liquidator acting in their official capacity, as established in Metalloy Supplies Ltd v MA (UK) Ltd. 

The NPCO Application Process: A Brief Overview

Applying for an NPCO involves distinct procedural steps:

• • • Who and When: Usually, the successful party applies after it becomes clear the losing party can’t pay. Applications are ideally heard by the trial judge. Early warning to the non-party is advisable. 
    • Joinder and Hearing: The non-party must be formally joined to the proceedings for costs purposes and given a chance to be heard at a dedicated hearing (CPR 46.2).
    • Evidence: The applicant must provide evidence to support the grounds for the NPCO, demonstrating factors like control, benefit, and causation. This might include funding agreements, correspondence, or financial records. Disclosure orders can sometimes be sought to obtain necessary information. 

Key Risks for Non-Parties

The NPCO regime presents significant risks:

• • • Financial Liability: The most obvious risk is being ordered to pay substantial legal costs, potentially exceeding any initial investment.
    • Additional Legal Costs: Defending an NPCO application incurs further expense.
    • Reputational Damage: A finding of improper conduct can harm a non-party’s reputation.
    • Uncertainty: The discretionary nature of NPCOs means outcomes can be hard to predict.