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Judge entitled to penalise on costs for conduct that 'fell below acceptable standards'

Out-Law News | 24 Apr 2017 | 9:38 am | 3 min. read

A High Court judge was entitled to use his discretion to penalise a firm of Russian stockbrokers in costs for conduct that "fell below acceptable standards", even if that conduct was not strictly an abuse of process, the Court of Appeal has ruled.

High Court judge Mr Justice Knowles had ordered Otkritie Capital to pay 75% of the costs of its opponent, Threadneedle Asset Management, which had unsuccessfully applied to strike out Otkritie's claim that it was vicariously liable for the conduct of a former employee. This was because Otkritie was in breach of the so-called 'Aldi guidelines', which require a party to seek direction from the court in the first action before it sues another party on the basis of the same facts.

Dismissing Otkritie's appeal against the costs order, as well as Threadneedle's appeal against the strike-out, Lady Justice Arden said that it was "well within the margin of [the judge's] discretion to make an order which marked the court's disapproval of [Otkritie's] conduct".

"The plain fact is that Otkritie was in breach of the Aldi guidelines, and the judge found that its conduct fell below acceptable standards of conducting litigation," she said.

"In those circumstances ... [the judge] was entitled to hold that Otkritie should not recover any of the costs of its successful defence to the application. It also meant that in addition he was entitled to require Otkritie to pay costs to Threadneedle. He then assessed the appropriate percentage at 75%. This was obviously substantial but it cannot be said that it was outside the margin within which reasonable minds may differ," she said.

The other two Court of Appeal judges agreed with Lady Justice Arden, although Sir Christopher Clarke said that the judge's costs order was "closer to the margin of his discretion than my Lady would place it".

"But I am not persuaded that it was beyond the boundary [of his discretion]," he said.

Otkritie had argued that the costs order breached the "fundamental principle" that a successful party to court action should be entitled to the costs of that action. The consequences would be to create a "perverse incentive" and give parties "a free ride to use the court's resources for an abortive application".

Named for a 2008 case involving the supermarket company, the 'Aldi' guidelines require a party to complex commercial multi-party litigation to seek directions from the court in Action 1 about the possibility that Action 2 may be brought in respect of the same facts against another party, who may or may not have been a party to Action 1. The judge must then, at the very least, express a view as to the proper use of the court's resources in relation to that other party.

The underlying action by Otkritie in this case involved its pursuit of various individuals involved in a fraudulent scheme through which Otkritie was duped into purchasing investments at a vastly inflated price. In March 2012 it added a Mr Gersamia, who had been employed by Threadneedle at the time of the fraud, to the case. It later sought to pursue Threadneedle vicariously for the actions of its employee. At no time, however, did it take any steps to join Threadneedle to the case or to seek direction from the judge in line with the Aldi guidelines.

Mr Justice Knowles found that, even if Otkritie had complied with the Aldi guidelines, it was unlikely that the court would have ordered for Threadneedle to be joined to the case because that would delay the trial. For this reason, the second action against Threadneedle was not an abuse of process. However, Otkritie's conduct fell 'well below' the standard of conduct which the court was entitled to expect, as its reasons for not joining Threadneedle to the case were that its solicitors would have had to resign because of a conflict of interest.

This was upheld by the Court of Appeal, along with the costs implications.

"In effect, the Court of Appeal has found that the fact that Otkritie was successful in defending its appeal didn't mean that the costs decision was wrong," said legal costs expert Keith Levene of Pinsent Masons, the law firm behind Out-Law.com.

"This again emphasises the extent to which a court can use its discretion in costs to punish a party whose conduct 'fell below acceptable standards of conducting litigation', as was the case here," he said.