SECURITY FOR COSTS - Will ATE insurance defeat an application?

The question of costs is often one of the main reasons why proceedings are settled or withdrawn. The question of who pays the costs of proceedings is usually not determined until the claim (including any counterclaim) has been disposed of by virtue of a consent order, an interim process or trial. The general rule in court proceedings in England and Wales is that the loser is ordered to contribute towards the winner’s legal costs. If any party is unsuccessful during the course of proceedings it will (on most occasions) have to contribute to the other side’s costs as well as having to pay its own costs in full. It is for this reason why parties are not generally allowed to ask for an interim order that their opponent provide funds as security to pay the seeking parties’ costs of the action if successful. However, there is an exception to this rule.

The court, pursuant to CPR Part 25.13 (1) and CPR Part 25.13 (2)(a) - (c), has the jurisdiction to order security provided it is satisfied, and having regarded all the circumstances of the case, that it is just to make such an order against the paying party. The court must satisfy itself that where the claimant is a company there is a reason to believe that it will be unable to pay its opponent(s)’ costs of proceedings if such an order was made against it. Once the court is satisfied, it has the discretion (see Sir Lindsay Parkinson and Co Limited -v- Triplan Limited [1973]) whether to make an order for security and the amount, if any.

The case of Keary Developments Limited -v- Tarmac Construction Limited [1995] provides useful guidance as to the criteria the court should consider when deciding whether an order for security for costs should be awarded against a company.

The court will take the following factors into account: (a) the risk of not being able to enforce a costs order;

(b) the merits of the claim; (c) whether the defendant may be able to recover costs from someone other than the claimant; (d) the impact on the claimant of having to give security; (e) whether the claimant’s difficulty in being able to provide security has been caused by the defendant’s activities; (f) delay in making the application; and (g) suspicions about the claimant’s financial position [1].

Pursuant to (b) above, when considering all the circumstances, the court will have regard to the paying party’s prospects of success [2] but will not go into the merits of success in details unless the defending party can show that there is a high degree of probable failure.

Pursuant to (d) above, the court will also perform a balancing exercise - on the one hand it will weigh the injustice caused to the paying party (often the claimant) if it is prevented from being able to pursue a claim caused by an order for security for costs, against the weight of the injustice caused to the applying party (often the defendant) if no security is ordered and at trial the claimant’s case fails and the defendant is unable to recover funds incurred in dealing with defending the claimant’s case.

During the assessment, the court will assess that the power to award an order for security for costs does not get used as an instrument of oppression or stifle a genuine claim [3], especially ‘…the failure to meet that claim might in itself have been a material cause of the plaintiff’s impecuniosity’ [4] but it will also be equally reluctant to order security if it considers that it might be used as a weapon whereby the impecunious party exploits its inability to pay the other party’s costs as a means of putting unfair pressure on the defending and prosperous party.

Known as After the Event ("ATE") insurance, when taken out (usually associated with conditional fee agreement) the insurance covers legal costs and disbursements (e.g. solicitors fee, court fees, barrister’s fees etc.) relating to civil proceedings. With the popularity of ATE insurances rising, the courts have had the opportunity to consider whether and under what circumstances ATE insurance is a form of providing security for costs. In Nasser v United Bank of Kuwait [2001] EWCA 556 Mance LJ made these obiter comments:

"I would interpose at this point that, even where a claimant or appellant is resident abroad, there may of course be special factors indicating that any order for costs will be satisfied in some other fashion. The interesting possibility was raised before us that a claimant or appellant who has insured against liability for the defendants' costs in the event of the action or appeal failing might be able to rely on the existence of such insurance as sufficient security in itself. I comment on this possibility only to the extent of saying that I would think that defendants would, at the least, be entitled to some assurance as to the scope of the cover, that it was not liable to be avoided for misrepresentation or non-disclosure (it may be that such policies have anti-avoidance provisions) and that its proceeds could not be diverted elsewhere. The new arrangements for the funding of litigation certainly appear capable of throwing up possible imbalance, in so far as they permit contingency fee arrangements with uplifts potentially recoverable from losing defendants, but enable claimants to pursue litigation without insuring or securing the defendants' fees. The claimant's contingency fee arrangement in the present case is, however, without uplift."

In the High Court case of Al-Koronky and another v Time-Life Entertainment Group Ltd [5], the Claimants appealed against a decision [6] ordering it to give security in relation to costs of the defendants in a libel action. The Claimants had a conditional fee agreement with their solicitors but no ATE insurance was in place until the time of its appeal. In the Court of Appeal judgment, Sedley LJ said:

"At more than one point of the judgment below, and at more than one point of the argument before us, the inflationary effect on costs of the claimants' CFA with their solicitors has been canvassed. In a paragraph cross-headed "The relevance of the conditional fee agreement" Eady J said this:

"It has already been recognised that when considering "unfair pressure" it is relevant for the court to take into account the fact that a claimant is pursuing his or her case with the benefit of a conditional fee agreement with a substantial uplift - especially if there is no "after the event" insurance ("ATE"): see e.g. the observations of Mance LJ in Nasser at [60]. Here it has, after a considerable lapse of time, finally been acknowledged on the Claimants' behalf by their solicitor that there is no ATE insurance that is likely to be of any value whatsoever to the Defendants should they succeed. What is more, as I understand it, there is no challenge to the Defendants' assumption that in this particular case there is likely to be a 100% uplift."

In other words, a claimant's (or a defendant's) engagement with its solicitors on a CFA has by itself no influence or impact on the court making an order for security for costs. However, in line with the decision in Campbell v MGN Limited (No.2) [7] if a claimant has in place satisfactory after the event insurance, provided that the insurance cover gives the defendant appropriate security and financial protection, the claimant may be able to resist an order being made against it for security for costs.

In the case of Michael Phillips Architects Limited v Cornel Clark Riklin and Susan Oglesby Riklin [8] the strength of after the event insurance was tested. The claimant told the court that it had adequate ATE insurance and therefore it should follow that security for costs should not be awarded. However, the court heard that the claimant’s policy could be ‘voidable’ or the ‘cover ineffective’ if their ‘eventual liability for costs is consequent upon [the claimant] not having told the truth’.

The High Court’s Akenhead J said:

"We have not been told what the premium was, but since the outcome of this case will depend entirely upon which side is telling the truth, one wonders what use the insurance cover is. If the claimants win, they will have no call on their insurers. If they lose, it is overwhelmingly likely that it will be on grounds which render their insurance cover ineffective [emphasis added]."

The approach adopted by the court when deciding an application for security

In Belco Trading Co v Kondo [2008] EWCA Civ 205 the Court of Appeal was asked to consider an order for security for costs which ordered the Claimant to make a monetary payment into the court funds account, or to secure an insurance policy which gave the Defendant an equal or better security for costs than the funds that the claimant would place on account. The Court of Appeal analysed the approach taken by the first instance judge and provided a valued insight into the approach adopted by the courts when dealing with an application for security for costs when the paying party has in place after the event insurance. The key elements of the case can be summarised as follows:

(1) An insurance policy should give the defendant (or the benefiting party) an equal or better security to that of a payment by the claimant (or the paying party) into court if security for costs pursuant to CPR 25 was ordered.

(2) The Claimant argued that the above requirement could never be fully met as a payment into court or securing a bank guarantee would always provide a ‘complete security’ and therefore trump or better an ATE insurance policy. The Claimant explained that an ATE policy is less secure because:

…the policy gives to the insurers many opportunities to cancel the policy for breach of its terms, quite apart from any insurer’s inherent right to avoid the misrepresentation or non-disclosure.’

(3) Longmore LJ provides that if the claimant has an ATE policy in place and the defendant can satisfy that the policy is not equal to or better than a payment by the claimant into court, it would not be unreasonable for the defendant to reject the policy as a form of security and demand a payment into court.

(4) It seems unlikely that any standard ATE policy could give a better or equal form of security than standard forms of security (money with the court or bank guarantee).

However, notwithstanding the above, Akenhead J from Michael Phillips Architects Limited v Cornel Clark Riklin and Susan Oglesby Riklin concluded by saying that he sees no reason why ATE insurance which is taken out by the claimant to cover its costs liability to the defendant, provided the terms are adequate, could not provide a suitable and sufficient element of security for costs to the defendant. However, proper analysis of the terms of the ATE policy would be required.

This is because, ATE policies will always be a lesser form of protection when compared with payments into court or bank bonds or guarantees. This is because ‘…insurance policies are voidable by the insurers and subject to cancellation for many reasons, none of which are within the control or responsibility of the defendant, and because the promise to pay under the policy will be to the claimant.’.

If the claimant is resisting an application or security for costs on the basis that it has an adequate policy, the claimant should focus its evidence, under the application, to demonstrate that it does in fact provide proper security.

If you are considering making an application for security for costs, resisting an application for security for costs by the other side, or are considering taking out an after the event insurance, we would be delighted to speak with you. Our solicitors are experienced litigators in the High Court and County Courts.

Should you required any further information on this topic or any other service areas, feel free to call

Riyaz Jariwalla on 01242 224433 or email on riyaz.jariwalla@bpe.co.uk

This article contains general information or opinion only and does not constitute legal advice. You should seek advice from BPE Solicitors LLP directly for any specific legal matter that you may have.

[1] Frost Capital Europe Ltd v Gathering of Developers Inc. Ltd (2002) LTL 20/6/2002 Back to article

[2] Porzelack KG v Porzelack (UK) Ltd [1987] 1 WLR 420; Swain v Hillman [2001] 1 All ER 91 Back to article

[3] Interoil Trading SA v Watford Petroleum Ltd [2003] EWHC 1806 (Ch), LTL 16/7/2003 Back to article

[4] Sir Lindsay Parkinson and Co Limited -v- Triplan Limited [1973] Back to article

[5] [2006] EWCA Civ 1123 Back to article

[6] [2005] EWHC 1688 Back to article

[7] [2005] UKHL 61 Back to article

[8] [2010] EWHC 834 (TCC) Back to article

These notes have been prepared for the purpose of an article only. They should not be regarded as a substitute for taking legal advice.