Posted: 22/02/2018
As the nights drew in, the end of 2017 saw a flurry of case law on security for costs, and particularly its interaction with after the event (ATE) insurance and litigation funding. This article considers what insights can be gleaned for litigants who do not want to be left out in the cold.
In Premier Motorauctions Ltd (in liquidation) v PricewaterhouseCoopers LLP [2017], the Court of Appeal considered the extent to which the existence of ATE insurance is relevant to a security for costs application sought by defendants to a claim brought by an insolvent company in liquidation. Following the second defendant stating that it would be seeking security for costs, the claimants notified the defendants that various ATE insurance policies had been issued to the claimants’ joint liquidators. Redacted copies of the policies were provided. The first defendant then asserted that because the policies could be avoided for material non-disclosure or misrepresentation, they were consequently not equivalent to a payment into court, a bank guarantee or a deed of indemnity issued by an insurer. The first defendant requested that a deed of indemnity be provided to cover its costs, but the claimants declined to procure one, leading to the applications before the court. The question of principle thus arose: 'Does ATE insurance which has no anti-avoidance provisions (and other exceptions or conditions precedent to liability) constitute adequate security for costs in a case requiring such security to be given?' (paragraph 5).
Referring to previous Court of Appeal decisions in Jirehouse Capital v Beller [2009] and SARPD Oil International Ltd v Addax Energy SA [2016], Longmore LJ emphasised the importance of the court avoiding paraphrasing, and applying the precise wording of CPR 25.13(2)(c), ie: “The claimant is a company…and there is reason to believe that it will be unable to pay the defendant’s costs if ordered to do so” [emphasis added]. So the test is not one of the balance of probabilities, or of a significant danger – it is simply that the court must have reason to believe. Furthermore, CPR 25.13(2)(c) is a jurisdictional requirement which must exist before the court has power to order security for costs.
The Court of Appeal, rejecting the defendants’ submission that ATE insurance should not be considered at all at the jurisdictional stage of the test, held that it was necessary to consider whether the ATE insurance gave the defendants sufficient protection. It was necessary in order to establish whether there was ‘reason to believe’ that the companies would be unable to pay the defendant’s costs if ordered to do so, and therefore whether the court had jurisdiction to make a security for costs order.
The Court of Appeal then considered whether the ATE insurance provided sufficient security in the particular case, and concluded that it did not. Longmore LJ disagreed with the finding of the first instance judge that the evidence of Mr Elliott, the 97% shareholder of the first claimant parent company and managing director of both claimants, would not be as central to the case as the defendants suggested. If Mr Elliott was not believed, the claimants would lose and be liable for the defendants’ costs. Although it did not necessarily follow that in those circumstances the insurers would avoid the policy, there was a risk, and neither the parties nor the court had sufficient information to be able to judge the risk of avoidance. It was particularly relevant that the ATE policy in question did not include an anti-avoidance provision that would have prevented the insurer from avoiding liability except in the case of fraud.
The lack of assurance for the defendants meant that there was indeed reason to believe that the claimants would be unable to pay the defendants’ costs if ordered to do so, and the court therefore had jurisdiction to make an order. Once the court was satisfied that the companies were insolvent, that there was jurisdiction to order security for costs and that ordering such security would not stifle the claim, the normal course was, with the court applying its discretion under CPR 25.13(1)(a), to order that security be provided. As Longmore LJ noted: “Unless security is ordered, there will be no level playing field as the Companies have no reason to suppose that they will be unable to recover costs if they win” (paragraph 37).
Accordingly, the Court of Appeal unanimously allowed the appeal and ordered the claimants to give security for costs (albeit in lower sums than the defendants had sought).
The guidance in Premier Motorauctions is especially important because, according to Longmore LJ, the case “raises important questions of principle which have not been previously considered at appellate level.” He observed that “authorities at first instance go both ways but the judgment of [the first instance judge] reveals that there may be a tendency (I put it no higher) for judges at first instance to accept that an ATE policy can stand as security for costs” (paragraph 30).
It is evident from the judgment in Premier Motorauctions that the existence of ATE insurance will be taken into account by the court when assessing a claimant’s ability to pay an adverse costs order, and that an appropriately drafted ATE policy might, in theory, defeat such an application. Whether it does so in practice will depend on the particular facts of the case and the precise wording and terms of the policy. The inclusion of an anti-avoidance provision will increase the chances of it being found to stand as sufficient security.
However, the starting point at common law is that an insurer can avoid liability where there is a material non-disclosure, misrepresentation or fraud. It is also of note that in another recent Court of Appeal case cited by Longmore LJ, Candy v Holyoake [2017], even an ATE policy including an anti-avoidance provision for all but fraud was held to be unsuitable to stand as fortification for a cross-undertaking in damages in support of an injunction. In any event, all ATE policies can be expected to contain some form of exclusions or conditions that give potential for the policy to be avoided. Furthermore, where a case turns on issues of honesty and whose evidence is believed in the witness box, there is a real possibility that cover might be avoided if the insured’s evidence is rejected by the court.
So, although it is established that the existence of ATE insurance will be relevant to the jurisdictional stage of the test for security for costs, overall, Premier Motorauctions has diminished the prospects of successfully relying on it to defeat a security for costs application. This will be a welcome development for defendants, but less so for insured claimants and particularly the liquidators of insolvent companies, some of whom have already relied on the first instance judgment. In the light of these developments, claimants would be wise to seek an anti-avoidance provision for all but fraud in their policy from the outset, and, if faced with the threat of a security for costs application, to consider seeking an appropriate deed of indemnity from the insurer. Otherwise, their arguments that an ATE policy counts as sufficient security may well meet with a frosty reception.
Similar issues subsequently arose, and a litigation funder faced a chilling proposition, in the case of Bailey v GlaxoSmithKline UK Ltd [2017]. In Bailey, the High Court considered a security for costs application made under CPR 25.14 against the claimant’s litigation funder. Although it was generally accepted that security should be provided (the funder being balance sheet insolvent and without capital), and that the court had jurisdiction to make such an order, arguments again centred on whether the claimant’s ATE policy should be taken into account when determining the level of security to be paid. In this case, as with Premier Motorauctions, the ATE policy did not include an anti-avoidance clause.
Citing Premier Motorauctions, Foskett J observed that the lack of an anti-avoidance provision brought into play Longmore LJ’s finding that where there is no anti-avoidance clause of any kind, the exercise of assessing the likelihood of avoidance is much more difficult for the judge, and the defendant’s need for assurance is all the greater. Moreover, in Bailey, no copy of the proposal had been disclosed, meaning that it was not possible for the court to evaluate the statements made to the insurers by the claimants to determine whether they were accurate or complete. Because of all this, the court could not discount as merely ‘illusory’ the prospect of the insurer avoiding cover at some stage.
As the jurisdictional stage of the test was not in dispute, the court focused on the second discretionary and balancing aspect of the test. The funder argued that in assessing the level of security for costs to be ordered, the judge should deduct from the figure the entirety of the £750,000 insured by the ATE policy. The defendant argued that none of it should be deducted. Taking a broad approach, Foskett J held that the risk of the ATE policy being later avoided could be reflected by deducting two-thirds of the sum of £750,000 (ie £500,000) from the amount of security to be otherwise provided. This reflected his assessment that it was likely the policy would remain intact and available for part payment of the defendant’s costs should it succeed, but that there was also a ‘more than minimal risk’ that it would not.
The decision in Bailey is also notable because the amount of security that the court ordered the litigation funder to pay was in excess of the ‘Arkin cap’ – the approach set out in Arkin v Borchard Lines Ltd (Nos 2 and 3) [2005] under which a professional funder’s liability for adverse costs is limited to the extent of the funding provided by the funder to the litigant.
In giving judgment, Foskett J distinguished the situation in Bailey from that in Arkin:
He held that if there were an absolute prohibition against ordering the funder to pay more at the conclusion of the trial than the amount they had contributed to the litigation, then he could see the force of the argument that the court should not award security that exceeded that sum. However, a number of factors mitigated against that proposition:
Furthermore, it was noted that the court’s discretion under CPR 25.14 is very wide.
All things considered, Foskett J concluded that the applicability or otherwise of the Arkin cap was only one factor to determine on the application, but in any event, if he ordered security for a higher sum than the present limit of the cap, then no injustice would be done if the cap was later ultimately applied. The additional money paid into court could eventually be repaid to the funder in the event that it was not required following the decision of the trial judge.
He also noted a number of persuasive voices who have spoken out against the Arkin cap, for example, Jackson LJ in both his 2009 Review of Civil Litigation Funding: Final Report and the 2017 edition of Cook on Costs, the City of London Law Society and the Commercial Litigation Association (as both referred to by Jackson in his 2009 report), and the Court of Appeal in Excalibur Ventures LLC v Texas Keystone Inc [2016]. Accordingly, in order to do justice and in all of the circumstances, the court in Bailey ordered security in excess of the cap (even allowing for the reduction to the figure in light of the ATE insurance).
The approach seen in Premier Motorauctions, as followed and applied in Bailey, provides much needed clarity at appellate level on the relevance of ATE insurance to security for costs applications. On the one hand, it is now clear that it is right for the court to consider any ATE policies in place when determining whether the jurisdictional hurdle – that there must be reason to believe that the claimant would be unable to pay the defendant’s costs – has been overcome. On the other hand, defendants can have confidence that the fact of the existence of an ATE policy alone will not of itself be enough to defeat an application: the court must undertake an analysis of the insurance, including the policy terms and exclusions, the standing of the insurer, and all of the wider circumstances of the claim. Where an ATE policy does not include an anti-avoidance clause, it is much less likely that the policy will stand as sufficient security.
As to the treatment of the Arkin cap in Bailey, we see here a round rejection of the proposition that that cap should always dictate a professional funder’s liability for adverse costs. The cap is just one of several factors to be considered and as the judgment in Bailey indicates, those wishing to argue against the cap have various different options and/or arguments to deploy.
Generally positive news then for those seeking security for costs, particularly against claimants with ATE insurance and/or third party funding. For others however – insured claimants, liquidators of insolvent claimants, or litigation funders – the outlook appears somewhat more wintry.
This article was published in Commercial Litigation Journal in February 2018.
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