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Non-party costs orders and indemnity insurers: out of tune or a new refrain?

Posted: 11/02/2019


Non-party costs orders. Seemingly straightforward words, which in Various Claimants v Giambrone & Law (a Firm) & Ors [2019] EWHC 34 (QB), provided the claimants with an order for 50% of their legal costs against their former legal advisers’ professional indemnity insurers, AIG. Music to the claimants’ ears, indeed; less of a hit with the insurance community. But, catchy as this is to claimants, are non-party costs orders a leitmotif that we will hear more often in the courts now, or will this decision prove to be off key?

Overture: Jewel of the Sea

The underlying litigation in Giambrone involved a failed holiday development in Calabria. The claimants had all paid unusually large deposits (50% of the individual purchase prices for the unbuilt apartments) to Giambrone & Law (a firm of solicitors then practising in England and Italy) (Giambrone). Giambrone had then paid away those deposits in full, 62% to the promoter and 38% to the developers.

The development was never completed and was seized by the Italian Finance Police. The claimants, left without either holiday homes or deposits, successfully sued Giambrone in 2015 for negligence and breach of trust (Various Claimants v Giambrone & Law [2015], the 2015 judgment). The defendants then appealed to the Court of Appeal on five grounds. In an important judgment on the SAAMCO principles, the Court of Appeal dismissed the appeal (Main v Giambrone & Law [2017], Giambrone appeal).

The Giambrone appeal was the first case following the Supreme Court’s decision in BPE Solicitors v Hughes Holland [2017] UKSC 21 in which solicitors were held liable for the full consequences of their failure to properly advise their clients of the risks involved in a transaction, and to conduct the matter in such a way as to protect their clients from those risks.

However, Giambrone’s indemnity insurers, AIG, argued that there was no insurance money left for the claimants. The claimants decided a change of tempo was in order, and applied to court for a non-party costs order (NPCO) against AIG.

Continuo: non-party costs order

Underpinning the application is section 51 Senior Courts Act 1981, which provides that the ‘court shall have full power to determine by whom and to what extent the costs are to be paid’.

It is settled law that the words ‘by whom’ include persons and entities who are not formal parties to the litigation; the claimants could therefore make a section 51 application against AIG for payment of their costs.

Symphony: the authorities

Foskett J examined the authorities on section 51 in some detail. Despite noting ‘authoritative words of caution that excessive reliance should not be placed on them as precedent’, he held that it was ‘impossible’ at first instance ‘not to have regard to the circumstances in which the Court of Appeal and beyond have regarded the use of the jurisdiction as either appropriate or not appropriate… as affording at least some guidance on how to approach the task of exercising the discretion conferred by statute’ (paragraph 10).

The starting point, Symphony Group plc v Hodgson [1994] QB 179, provided the opening theme: NPCOs are exceptional, and a judge should treat any application for such an order with considerable caution. That said, the Privy Council in Dymocks Franchise Systems (NSW) Pty Ltd v Todd [2004] 1 WLR 2807 had varied this theme to emphasise that ‘exceptional’ means no more than outside the ordinary run of cases where parties pursue or defend claims for their own benefit or at their own expense. The ultimate question is whether in all the circumstances it is just to make the order.

Further recurring themes running through the authorities included the concept of pure funders, who do not stand to benefit from the litigation, are not funding it as a business, and do not seek to control it. Pure funders will not usually face a NPCO, as the court will prioritise the public interest in the funded party securing access to justice over the successful unfunded party recovering his costs.

In contrast, where a non-party does not simply fund the proceedings but substantially also controls or is to benefit from them, justice will ordinarily require the non-party to pay the successful party’s costs. They become, in essence, a ‘real party’ to the proceedings.

As Fisher J succinctly put it in Arklow Investments Ltd v MacLean (unreported) 19 May 2000 (New Zealand) in the High Court in New Zealand, ‘it is wrong to allow someone to fund litigation in the hope of gaining a benefit without a corresponding risk that the person will share in the costs of the proceedings if they ultimately fail’.

Counterpoint: indemnity insurers

The first case to specifically consider the position of indemnity insurers in the context of a section 51 application was Travelers Insurance Co Ltd v XYZ [2018] EWCA Civ 1099, which reached the Court of Appeal in 2018, and is currently on appeal to the Supreme Court.

Travelers was a group action concerning the supply of defective breast implants to a large number of claimants. One particular supplier, Transform, was insured by Travelers Insurance Co Ltd (Travelers) in respect of around one third of the claims made against it; the other two thirds were uninsured. In 2013, a trial of preliminary issues was ordered in four sample cases, two of which were uninsured claims. 

Travelers was required under the policy to pay the costs of defending the insured claims, including the costs of defending the common issues affecting both insured and uninsured claims. Travelers and Transform’s jointly retained solicitors advised Transform not to disclose the fact that some of the cases were uninsured. Transform entered insolvent administration in 2015, and the insured claims were settled by agreement shortly afterwards. The uninsured claimants obtained judgment in default against Transform and applied for a NPCO against Travelers.

Thirlwall J held at first instance that the case was exceptional and ordered Travelers to pay the uninsured claimants’ costs: but for Travelers’ interest in the litigation, Transform would have disclosed the lack of insurance, and the claimants would not have pursued the litigation. The Court of Appeal dismissed the appeal, and rejected the idea that the authorities laid down ‘a series of conditions which must be fulfilled before a costs order can be made against an insurer, such that if they are not fulfilled, an exercise of discretion against insurers must be wrong’ (paragraph 30).

In that case, Lewison and Patten LJJ found the asymmetry in Travelers’ position to be somewhat discordant. Had Transform succeeded on the preliminary issues, all claimants (insured or otherwise) would have been liable equally to contribute to their costs, which would have been to Travelers’ advantage. However, failure on the same issues meant that Travelers was liable only for 32% of the claimants’ costs. The fact that 400 uninsured claimants had joined the action did not impact on the costs incurred, but allowed Travelers to ‘fortuitously’ escape liability for 68% of those costs.

This offended the ‘principle of reciprocity’: if a person funds and stands to benefit from proceedings, justice requires that if they fail he should pay the successful party’s costs.

This issue had provoked comment from Foskett J at paragraph 76 of his 2015 judgment: ‘The position about the Defendants’ funding of this litigation is thus unclear and in a number of respects plainly unsatisfactory.  It is a most unattractive position that every point can be taken by the defendants against the claims brought by the claimants, with the risk to the claimants of having to pay the insurer’s costs if the defendants succeed, but the insurers cannot be made to pay the claimants’ damages or costs if the claimants succeed’.

Interlude: aggregation

The insurance position in Giambrone is complicated. AIG argued that it has the right to aggregate the various claims against Giambrone so that they amounted to a single claim for the purposes of Giambrone’s insurance policy, effectively limiting cover for those claims to £3 million payable to the claimants in respect of damages and/or costs. Unsurprisingly, the claimants challenged this alleged right as soon as it was first made known to them.

The defendants also challenged this alleged right, as early in the litigation as 2010, and the ‘differences of view’ (paragraph 34), as Foskett J termed them, had led to AIG and the four partners in the Giambrone partnership signing what was described as a binding heads of terms agreement (HOTS) in 2013. No such agreement was entered into between AIG and Giambrone Law LLP (the liquidated successor to the partnership). The key clause of the HOTS for present purposes is clause 2.4, which provides that: ‘AIG shall advance defence costs in respect of the Aggregated Claims provided always that AIG shall be entitled to withdraw funding for Defence Costs in respect of the Aggregated Claims in the event that it reasonably considers that there is no realistic prospect of defending the claim and on the basis that such Defence Costs are not or would not… be reasonably incurred’ (paragraph 39, Foskett J’s emphasis).

AIG relied on the HOTS to explain and justify its conduct in Giambrone, arguing that it was not in control of ‘its choice whether to defend the partners once the [HOTS] was in place’ (paragraph 35). AIG was not subject to the same limitations in respect of the LLP, and submitted that it did stop defending the LLP ‘when it could’, in December 2014.

It should also be noted that the law on aggregation was uncertain and in a state of flux during this period. AIG argued that the Supreme Court decision in AIG Europe Ltd v Woodman [2017] 1 WLR supports its position; the claimants disagreed. In any event, the position in 2013 (prior to the AIG v Woodman Supreme Court decision) was far from clear.

Interpretation: impact of the HOTS

AIG argued that they did not exercise sole or even predominant control over the defences, and should not, therefore, be held liable for the claimants’ costs. In considering this argument, Foskett J accepted that Avvocato Giambrone (the managing partner of Giambrone) played a central role in dictating the way the defences were conducted; but AIG’s evidence nonetheless did not suggest that they had no control at all over the conduct of the claim, and there was an inevitable overlap between giving instructions on settlement offers, evaluating the merits, and deciding on tactics (paragraph 52).

AIG further argued, post-HOTS, that ‘AIG was not at any time advised that there was no realistic prospect of defending the claims… or that those defence costs would not reasonably be incurred’ (paragraph 58). Since the partners in Giambrone had refused to waive legal professional privilege, it was not possible to scrutinise what advice was in fact given to AIG. However, as the claimants argued, clause 2.4 of the HOTS permits AIG to withdraw funding if it reasonably considers that there is no realistic prospect of defending the claim.

Could AIG have reasonably considered there to be a realistic prospect of defending the claim? Foskett J thought not. Correspondence from 2015 indicated that the defendants’ legal representatives viewed the claims as ‘extremely difficult to defend’ (paragraph 64). There was no direct evidence before the court of any other assessment by counsel or solicitors prior to the HOTS being signed. However ‘all offers of settlement from the conclusion of the HOTS onwards were at the high end of the nominal value’, which ‘suggests clearly a lack of faith in defeating the claims’ (paragraph 66).

Foskett J also drew attention to correspondence between AIG’s legal representatives and Avvocato Giambrone regarding AIG’s refusal to fund his appeal, in which they said: ‘It may well be that on a proper analysis AIG could have taken the position at an earlier stage to withdraw defence costs. However, it elected not to do so’ (paragraph 69).

The fact that, by failing to invoke clause 2.4 of the HOTS, AIG allowed the defendants to incur substantial legal costs, hit the wrong note with the court. The flip side to this was that the claimants, whose prospects of success must have been at least ‘good’, were put to the expense of an 18 day trial (plus associated hearings) to obtain ‘that which, on all realistic predictions, was the likely outcome’ (paragraph 72).

A question for Foskett J was why AIG agreed to have its hands tied so much more tightly by the HOTS than had previously been the case. AIG argued that this was because the partners would not agree to any settlement which exposed them to personal liability. Foskett J agreed that this was an impediment to settlement, but ‘failing to achieve settlement is one thing, continuing to provide significant defence funding on a case that is more likely than not to be lost is another’ (paragraph 74).

Nor was the court persuaded that, since Giambrone effectively controlled the defence to the litigation, AIG was protected from a successful section 51 application: that would involve ignoring the circumstances in which AIG ceded its power. Signing the HOTS may have been commercially sensible, but it could not exclude the discretion to impose adverse costs consequences against AIG under section 51. 

First movement: principle

Foskett J held that, in principle, the claimants had established their entitlement to some award: ‘… where an indemnity insurer substantially relinquishes control of the conduct of the litigation to the insured (or fails to take steps to control it when there are grounds for intervening), and does so in the expectation that it will be immune from a costs liability towards the opposing party if the opposing party is successful, that expectation is open to be falsified by the court in a section 51 application, particularly if the prospects of success for the insured are poor’ (paragraph 78).

This was the essential basis for making an order in this case, and a stand-alone factor which opens up the broad discretion under section 51. Further support is to be found in the reciprocity principle cited in Travelers, and in TGA Chapman Ltd v Christopher [1998] 1 WLR 12.

Moreover, AIG benefited from signing the HOTS, because it purported to settle the aggregation issue in relation to Giambrone at a time when AIG had doubts about whether its interpretation of the issue was correct. Although this arrangement (and the payment of defence costs) was not for AIG’s sole benefit, the fact that AIG did derive material benefit from the HOTS struck a chord which chimed in favour of the claimants’ application.

Second movement: causation

Principle established, Foskett J moved briskly on to causation. Among other reasons, Avvocato Giambrone was as much a businessman as lawyer; if he had been funding his defence personally he would have been much more circumspect about his potential exposure to costs. Funds given to him by AIG in settlement of other issues had been used to discharge earlier costs orders. AIG’s funding of the defence did therefore materially increase the costs expended by the claimants.

Third movement: quantification

Causation established, Foskett J could only decide how much AIG’s defence funding had increased costs by on a broad-brush basis from his experience of having presided over the proceedings as a whole including the trial. The litigation had been hotly contested, every possible point was taken on Giambrone’s behalf, and few concessions were made, very late, and only when the position had become untenable. This was a ‘war of attrition, but one which could probably have been substantially avoided if AIG’s funding had not been provided and AIG had exercised proper control over its expenditure’ (paragraph 110).

Foskett J, erring on the side of caution, thus held that ‘the Claimants will have spent twice as much on pursuing their claims than they would have done if AIG had not funded the defence of the claims in the way it did after the HOTS were concluded’ (paragraph 111). It followed that AIG should therefore pay one half of the claimants’ costs as assessed.

Coda and finale

Giambrone is a significant decision, both for claimants who find themselves facing impecunious but insured defendants, and for indemnity insurers. Indemnity insurers need to be alert to the possibility that they may be found liable for costs under a NPCO where they derive material benefit from the litigation and relinquish control of the litigation, or fail to intervene where it would be proper to do so (for example, where the insured’s prospects of success are poor).

Claimants will need to establish both that this principle applies to the specific circumstances of their case, and that the insurers’ (in)action caused costs to increase. The final flourish will be putting a figure on the appropriate contribution. It will be interesting to see how the courts wield this particular legal baton in future cases: will there be an enthusiastic encore, or a more restrained reception altogether?

This article was published in Commercial Litigation Journal in January 2019.


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