Exception to the rule

As soon as the litigation was lost and the company was faced with a substantial judgment, it went into liquidation. That’s what happened in a case called Gemma Ltd vs Gimson. Gemma Ltd had lost the building case and Mr and Mrs Gimson were awarded £244,000 on their counterclaim, plus costs. None of it was paid because Gemma Ltd went bust. The usual rule is that the corporate entity provides that the limited company is a separate personality and the actual owners can’t be got at personally.

Sometimes, though, the court will lift the corporate veil and take a peep at what went on in the company. That’s what Mr and Mrs Gimson have recently done. They went back to court for an order that the costs of the litigation last year is also a personal liability of the two owners of Gemma Ltd. And those costs are whopping.

Gemma Ltd was a contractor. It built one-off luxury dwellings for personal customers. The company was owned and run by Gary Davies. He was hands-on and so, too, his wife Donna Davies. She did all the books and so on. They owned Gemma Ltd completely.

I bet they were delighted when Joanne and Paul Gimson commissioned Gemma Ltd to build their £1m-plus home. They were not delighted by the time the house was nearly ready. Gemma Ltd said it was finished. Their customer said it wasn’t. Money was held back, Gemma Ltd wouldn’t hand over the keys.

The formal position of Gemma Ltd’s owners is that of an outsider. But there is a device via the Courts & Legal Services Act 1990 to seek a “third-party costs order”. The winners in the building litigation came back to court seeking an order for a non-party (the company owners) to pay the costs of the court proceedings. It is an order in addition to, or in substitution of, the party in the litigation that lost and had the usual costs order made against the loser. Traditionally the courts have been chary of making such orders. So Judge Thornton in the Technology and Construction Court made a helpful analysis of the recent cases and statute. More of that later.

First, let me tell you about a not-so-uncommon turn of events. Although the builder is, or was, Gemma Ltd, its owners Gary and Donna Davies got upset with their customer. I see that happen time and again. People really do dig in. The dispute descends into conflict. The litigation becomes, as the judge said here, a crusade. It is sometimes the case that the clients mislead their own legal team. There isn’t exactly dishonesty – rather a red mist blurs reality. Facts, events, circumstances become nourished by that blinding desire to beat the hell out of the opposition.

Exception to the rule

Gemma Ltd or if you will, Gary and Donna Davies, argued in the first trial the unfinished works were not Gemma Ltd’s unfinished works. Rather they were the unfinished works of their customer’s subcontractors. It came out late in the trial by tracing VAT reclaims that the subbies were always that of Gemma Ltd. So it was well known but concealed by Mr and Mrs Davies that their case was misconceived. It was their antagonism towards their client, which caused them to be blind to the flaws in Gemma’s case. They even failed to inform the professional advisers of this evidence.

For a costs order against the company’s owners in person, the starting position is that such an order is exceptional. It erodes the principle that a company has separate liability from the individuals associated with it. Then ask if the “non-party” has funded or part-funded the insolvent company’s part in the litigation. Then ask if, by so funding, the opponent party incurred legal costs because of that. There is nothing wrong with doing so if the motive was a duty to the company or it was done in the best interests of the company, its creditors and shareholders. But the brownie points disappear if the funding was for an ulterior purpose not connected with the company.

The judge concluded the owners of the company had unreasonably pursued the litigation. Their claim “was only being pursued out of a misguided and wilful desire to maintain what can only be described as Mr and Mrs Davies’ vendetta against Mr and Mrs Gimson”. Oh dear.

Tony Bingham is a barrister and arbitrator specialising in construction. You can write to him at 3 Paper Buildings, Temple, London EC4 7EY, or email him on info@tonybingham.co.uk

A costs order against the company’s owners erodes the principle that a company has separate liability from the individuals associated with it