Costs liability for challenging jurisdiction

The general rule on litigation costs is that the loser will pay the winner’s costs. There are, however, exceptions to the rule, including those under CPR 46.1 which concerns costs in special cases. One is the costs associated with making a pre-commencement disclosure order against a non-party to the litigation. In such cases, the general rule is that the court will award the non-party its costs of the application and for complying with the order made on the application. What is the position where a respondent to the application challenges the application on the grounds of jurisdiction? Is such an application caught by CPR 46.1 even if the challenge fails? These issues came before the Court of Appeal in Gorbachev v Guriev.

The case, listed for trial in 2024, concerns a dispute between the first and third respondents over interests in a Russian fertiliser business. One of the issues is that two Cypriot companies (the trustees) acted as trustees of two Cypriot trusts. The first respondent argues that the trustees have been operated by close associates of the third respondent. The trustees were represented by a solicitor who subsequently joined Forsters. The first respondent’s solicitors wrote to Forsters seeking disclosure of relevant documents. Forsters identified potentially relevant documentation.

The first respondent issued an application for non-party disclosure pursuant to section 34 of the Senior Courts Act 1981 and CPR 31.17. At the hearing, the first respondent applied orally and without notice for permission to join the trustees to the application and to serve on them out of the jurisdiction. The judge granted the application and permission to serve out of the jurisdiction. He held that there was a serious issue to be tried and that the matter fell within the gateway in CPR PD6B, paragraph 3.1(20). The judge ordered that service on Forsters. The application was served on the trustees at Forsters’ offices. The trustees then applied to set aside the order on jurisdictional grounds, arguing, inter alia, that the matter did not fall within the gateway.

Mr Justice Jacobs dismissed the jurisdictional challenge and ordered the trustees to pay the costs, applying the general rule in CPR 44.2(2)(a) that an unsuccessful party will be ordered to pay the costs of a successful party. The trustees appealed the costs order, arguing that Jacob J should have applied the general principle for third-party disclosure applications, reflected in CPR 46.1, which is that a successful applicant should pay the third-party’s costs of the application unless the third party has behaved unreasonably.

In the Court of Appeal, the trustees were successful. The trustees argued:

i.    The judge should have applied the principle that a third party resisting a third-party disclosure application will be entitled to their costs, even if they challenge the application and the application is unsuccessful, unless they have behaved unreasonably.

ii.    The costs in this case fell within CPR 46.1, but the principle should have been applied irrespective of whether CPR 46.1 was applicable on its terms.

iii.    To treat the jurisdiction application as ‘self-standing’ was to promote form over substance. The challenge to jurisdiction and to the merits of the application were simply two grounds for resisting the disclosure application.

iv.    It was reasonable for the trustees to advance the jurisdiction challenge in circumstances where at the lowest there was doubt as to whether the court had jurisdiction to order disclosure.

v.    Alternatively, if the Court of Appeal was persuaded that the challenge was not wholly reasonable, the appropriate order would be no order for costs.

Popplewell LJ, giving the leading judgment, held that the costs fell within the spirit of the rule and, therefore, the first respondent should pay the costs of the application. He explained that the issue was whether the costs incurred in relation to the jurisdiction application came within the description of ‘costs of the (disclosure) application’. The costs of the jurisdiction application was part of the costs of the disclosure application because the jurisdiction challenge was one of two bases upon which the Trustees had resisted disclosure.

Popplewell LJ recognised that a non-party could legitimately seek to protect the privacy of the information it held by challenging jurisdiction as well as challenging the substantive merits of the disclosure application. As his lordship explained: ‘If it is not unreasonable for an innocent third party to resist disclosure, I can see no justification for having a different costs rule where the resistance is on the grounds that the court has no power to make the order from that where there is resistance on any other grounds. Both are legitimate means by which the third party may seek to protect the privacy of its information.’ Thus, the costs incurred fell within the costs of the disclosure application and, as a consequence, the judge had erred in treating the jurisdiction application as a self-standing application which took the costs incurred outside the scope of CPR 46.1.

The Court of Appeal stressed that their decision did not give a ‘free ride’ to an overseas third party to challenge the jurisdiction of the English courts at the expense of the applicant for third-party disclosure, and that a tactical use of a jurisdiction challenge in this manner would amount to ‘unreasonable conduct’ and would therefore justify setting aside the approach taken by the Court of Appeal. There are two concerns, however, with the court’s conclusions.

The first relates to judicial construction of the necessary rules. CPR 46.1 clearly and expressly refers to ‘disclosure applications’ – that is so in both the title of the rule and the subsequent provisions. It is, therefore, difficult to see any doubt as to the scope and application of the rules to that that only relate to disclosure. The second concern relates to the real possibility that their parties will seek to challenge jurisdiction as a tactical manoeuvre to attempt to defeat a disclosure application and for those costs to be covered by the applicant.

Masood Ahmed is an associate professor of law at the University of Leicester and a member of the Law Society’s Dispute Resolution Committee