Claimants who settled on "no costs" basis held liable for costs through back door

In circumstances where two claimants had settled their claims against the defendant on a "no costs" basis and a third claimant had continued to trial and lost, the Court of Appeal held that the settling claimants should contribute to the defendant's costs payable by the continuing claimant for the period in which they had all advanced the same (unsuccessful) case: Dufoo v Tolaini [2014] EWCA Civ 1536. The settling claimants should not however be required to contribute to costs for the period after they had fallen out with the continuing claimant and served separate pleadings, or after they had settled.

The decision is an important reminder for claimants who are considering going it alone with a settlement while their fellow claimants continue the action. Even if the terms of settlement prevent the defendant seeking costs against the settling claimants, they may still end up with a costs liability through the back door. So unless the defendant will agree to an indemnity against such liability, this is a factor that should be taken into account in weighing up the benefits of the settlement.

Background

Three claimants brought proceedings against a common defendant in a shareholder dispute. They originally relied on the same points of claim but they subsequently fell out, instructed separate lawyers and served separate pleadings.

Shortly before trial two of the claimants settled with the defendant. The terms of settlement included that the defendant would not seek any order for costs against the settling claimants. The third claimant continued the action and lost.

The judge ordered the continuing claimant to pay 80% of the defendant's costs. He declined to order the settling claimants to make any contribution to those costs as he took the view that such an order would undermine the settlement agreement. The continuing claimant appealed, including against the judge's refusal to order a contribution by the settling claimants.

Decision

The Court of Appeal allowed the appeal (Jackson LJ giving the leading judgment, with which Gloster LJ and the Chancellor of the High Court agreed).

Jackson LJ said the judge had erred in treating the settlement agreement, to which the continuing claimant was not a party, as a good reason for rejecting the contribution claim. He ought to have ordered the settling claimants to contribute to costs for the period when all three claimants were advancing the same case. No contribution should however be required for the later period, when the claimants advanced separate claims. Nor should a contribution be required to the extent that the costs liability had increased because the continuing claimant was ordered to pay indemnity costs for part of the period in question.

The Court of Appeal remitted the case back to the trial judge for him to assess the contribution in the light of the guidance given in its judgment.