Practical Law

In a commendable judgment dated 24 October 2016 in Premier Motorauctions v Pricewaterhouse Coopers, Snowden J injected a much needed dose of realism into an issue which had, for too long, suffered from a regrettable degree of uncertainty, namely security for costs applications against parties with after the event (ATE) insurance cover. Cases this year suggest that this is now a go-to authority for applications of this sort.

CPR 25.13 lists as a ground under which security for costs may be ordered against a claimant the fact that the claimant is a company and there is reason to believe that it would be unable to pay the defendant’s costs of and incidental to the litigation brought if it was ordered to do so.

This provision is frequently applicable in circumstances in which claims are brought by companies in administration and liquidation. It plainly provides an obstacle to companies in such a position who are contemplating bringing such claims.

The advent of ATE insurance policies into the litigation marketplace appeared initially to provide a quick-fix solution to the conundrum faced by insolvent companies whose genuine, and often strong claims, might be frustrated by an application for security for costs. The theory was that, by insuring oneself against the risk of an adverse costs order, the claimants could argue that the obligation to pay the defendant’s costs would fall on the insurer and not on the insolvent claimant. The solvency of the claimant thus became irrelevant.

However, it is evident that defendants still sought to present arguments that orders for security for costs should be made against claimants who held ATE insurance policies. The arguments made in support of these applications typically focused on the fact that, in certain circumstances, the ATE insurance policy might be cancelled by the insurer during the course of the litigation. Such cancellation risked leaving the defendant unable to recover its costs.

In Michael Phillips Architects Ltd v Riklin, Akenhead J gave a powerful judgment which offered much hope for defendants who sought to obtain security for costs from claimants despite the existence of ATE insurance policies.

His Lordship heard a great deal of evidence concerning the scope of the ATE insurance policy which had been taken out by the claimants in that case. He noted a number of limitations and qualifications apparent from the terms of the policy.

Akenhead J commented, at paragraph 27:

“Any failure by the Claimants to fulfil its “responsibilities” could lead to cancellation… Whilst it might be said it is subject at the very least to a need on the part of the insurer to act in good faith, it is potentially a draconian right. There is nothing in the Policy which spells out what the financial consequences of a cancellation are. It is at least highly arguable that the insurer, following a valid cancellation, has no obligation to indemnify the insured unless the obligation had already accrued, for instance if there was already a court order requiring the Claimant to pay the Defendants’ costs. It is at least foreseeable that, if the cancellation occurred before the commencement of the trial, the insurer would have no obligation with regard to costs orders made thereafter. This would negate any potential benefit or security with regard to the Defendants’ costs.”

On the basis of these observations, His Lordship felt that security for costs should be ordered.

Cases decided subsequent to Riklin came to various conclusions as to the impact of a claimant’s ATE insurance policy on a defendant’s application for security for costs. In Geophysical Service Centre Co v Dowell Schlumberger (ME) Inc, Stuart-Smith J declined the application for security for costs. His Lordship, at paragraph 29, reasoned as follows:

“Turning to the contract conditions, breach of which would allow insurers to avoid or cancel the policy, I would accept that there is a theoretical possibility that a breach may occur. But there is no reason to suppose that the possibility is anything more than theoretical on the evidence that is available to the court on this application.”

In Harlequin Property (SVG) Ltd v Wilkins Kennedy (a Firm), Coulson J felt that the circumstances of his case were materially different from those at issue in Dowell Schlumberger, notably because the matter before him included allegations regarding parties incorporated overseas, and involved allegations of fraud and insolvency. His Lordship heard two particular objections to the ATE policy. One was held not to be well-founded. The other, better, objection was that because the defendant was a third party to the insurance policy, there was a real risk that it would not receive the benefit of any payout in the event that the claimant went into liquidation prior to the payout. Coulson J was plainly concerned by this, stating at paragraph 32 that:

“… there is a real risk that, if the claimants are the subject of insolvency proceedings in SVG, any sums under the ATE policy may have to be paid out by DAS, not to the defendant, but to the claimants’ insolvency practitioner in SVG. That would be significantly detrimental to the defendant’s rights. It could even make the ATE cover worthless for them.”

These authorities gave the impression that the question of whether an ATE insurance policy could be used successfully to oppose an application for security for costs was highly fact-specific. This gave claimants little certainty as to whether they had validly protected their position by taking out cover and gave little certainty as to the prospects of success of a defendant’s application for security for costs.

It is hoped that the judgment of Snowden J in Premier Motorauctions will bring some much needed clarity, at least as regards the approach which courts should adopt going forwards. His Lordship emphasised the importance in taking a practical, rather than hypothetical approach to the analysis of the terms of the ATE insurance policy. He said, at paragraph 52):

“The ATE market in the UK is now a substantial and mature one, and a significant part of that market relates to the funding of insolvency cases. It is also one in which the relevant professionals such as insolvency practitioners and solicitors are well informed as to the reputations of the rival ATE insurers. In this situation, whilst ATE insurers are of course entitled to take a stand on their policy terms and conditions, they are unlikely to have a commercial incentive to take an unusually defensive line in seeking to avoid liability under the policies they issue. If they were to do so, this would soon become known in the market, and potentially profitable future business would be placed elsewhere.”

After addressing a series of submissions made about the effectiveness of the ATE insurance policy, His Lordship concluded at paragraph 74:

“For the reasons that I have explained, the defendants have failed to satisfy me that there is reason to believe that the companies will be unable to pay the defendants costs already incurred and of the initial stages of the proceedings if ordered to do so.”

Based on subsequent authorities such as Dunn Motor Traction Limited v National Express Limited, it is apparent that the stance taken by Snowden J in Premier Motorauctions and Stuart-Smith J in Dowell Schlumberger represents the correct present position, albeit there are suggestions that this may be challenged in the Court of Appeal in due course.

In the author’s view, launching such a challenge would somewhat misunderstand the state of the authorities in this area, and the extent of the changes brought about by the Premier Motorauctions and Dowell Schlumberger decisions. Neither judgments changed the law, nor offered a novel interpretation of the relevant provisions of the CPR. What they did was to shift the emphasis of the debate away from hypothetical technical criticisms of the drafting of ATE policies into a practical and pragmatic assessment of the risk that the defendant’s costs would go unpaid.

This shift in emphasis is both more commercially sound and more closely tied to the language of the CPR. It seems inevitable, therefore, that it reflects the future of security for costs applications.