Duncan Batchelor
and Ralph Cox

The solvency or otherwise of the other party to a commercial dispute is a matter which can be of crucial importance when it comes to recovering costs incurred in litigation. A stark example of that is provided by the recent Scottish intellectual property case of Reactec Limited v Curotec Team Limited [2021] CSOH 72.

Facts of the case

Following a hearing on the evidence, Reactec obtained an interdict preventing Curotec from infringing its patent rights when producing devices for measuring vibration exposure. The expenses incurred in respect of that litigation were no doubt significant. Shortly after the proof before answer, Curotec went into voluntary liquidation. Reactec sought to recover its expenses from Curotec’s parent company – Rebound Technology Group Holdings Limited (“Rebound”).

Reactec argued that Rebound should be found liable for the costs of the litigation as they were dominus litis – essentially the real party controlling the litigation.

Rebound as dominus litis?

Reactec pointed towards a number of key factors in order to argue that Rebound should be liable for its expenses. First, Curotec was owned by the V&M Group. Rebound owned 75 per cent of the shares in the V&M Group, and was therefore the ultimate parent company of Curotec. Secondly, two of Curotec’s three directors were also directors of Rebound. Thirdly, Rebound provided working capital to Curatec which allowed that company to defend the action for interdict and make a counterclaim. Finally, the instructions in the litigation came from two individuals, neither of whom were officers of Curotec. One of the individuals was, however, a director of Rebound.

The court held that in order to meet the test for dominus litis, the party must have the true interest – that being the whole interest in the case for all practical purposes. They must have complete control arising from that whole interest. The corresponding result was that Rebound did not have the true interest for all practical purposes, and was not in control.

There was nothing to suggest that Curotec did not operate its own business. It had its own directors, employees, customers, assets and creditors. The result of the interdict proceedings was not immaterial to the company and it plainly had an interest, with the outcome potentially giving rise to substantial financial losses and even insolvency. It could not therefore be said that Rebound had the whole interest. The court refused to find that Rebound were dominus litis. Rebound were therefore not liable for Reactec’s expenses. As a result, despite being entirely successful at proof, Reactec will be an unsecured creditor in Curotec’s liquidation.

The result is not altogether surprising. The courts are generally slow to hold that a party, who was not the subject of litigation, should be liable in expenses. Whilst dominus litis arguments are most commonly made against insurance companies, this case is a reminder that the argument can be taken against any party, and may be of use where there is a complex structure of parent and holding companies behind a defender to an action.

An alternative safeguard for litigants

So how might a successful litigant safeguard their expenses and protect against the risk of the opposite party going into liquidation?

One option in Scotland is to seek caution, whereby a sum of money or bond is lodged with the court by way of security for the expenses of the action. Where the party pursuing the action is an individual, with a stateable case, it will only be in exceptional circumstances that the individual will be ordered to find caution. To do so would effectively prevent the pursuer from proceeding with their action.

Where the pursuer is a UK limited company, there is not such a high hurdle. In terms of section 726 of the Companies Act 1985, the court can grant an order that the pursuing company find caution if it appears, by credible testimony, that there is reason to believe that the company will be unable to pay the defender’s expenses if successful in his defence. The action will not be allowed to proceed until caution is lodged with the court. Similar rules exist at common law to obtain caution from foreign companies.

Although it is competent in exceptional circumstances, Scottish courts will not, as a general rule, order a party defending an action to find caution. If a defence is considered to be without merit, the courts are more likely to grant summary decree. One potential exception in intellectual property actions in particular can be where a counterclaim is lodged by a defender. In that situation, arguably, the defender becomes the pursuer for the purposes of the counterclaim.

Similar orders are obtainable in the rest of the UK and there are statutory provisions giving the courts in England and Wales a wide discretion on costs. As a result, the threshold requirements for non-party costs orders are perhaps not as strict as those in Scotland.

Generally speaking, however, in any commercial dispute it will be sensible to carry out early investigations into the solvency of the other party. That intelligence can then be factored into commercial decisions to be made during the litigation.

Duncan Batchelor, Ralph Cox and Lyndsey Combe are lawyers at Clyde & Co