An application for security for costs may be made when a defendant is concerned that the claimant will not be able to pay the defendant's costs should the claim fail. Claimants often point to the fact that they have after the event insurance (ATE) to challenge such applications. ATE is an insurance policy covering the legal costs and expenses of the claim, but the recent case of Lewis Thermal Limited v. Cleveland Cable Co Limited  EWHC 2654 (TCC) demonstrates the difficulties of attempting to rely upon ATE, where the actual provisions of the policy inhibit it as security and the claim is considered speculative.
The claim itself was for breach of contract and fraudulent misrepresentation relating to electrical cabling provided by the defendant to Guardian ECL Limited (Guardian), which Guardian claimed was defective, resulting in a loss of business of £8 million. Prior to its liquidation, Guardian assigned the claim to the dormant claimant company.
Test for security for costs
Under CPR r25.13 the court will apply a two-stage test when considering an application for security for costs. It has to be satisfied that:
- one of the conditions under CPR 25.13(2) is met – in the present case, that there is reason to believe the claimant company would be unable to pay the defendant's costs (the threshold test); and
- having regard to all the circumstances, it is just to make such an order (the discretionary test).
The threshold test: the claimant's ability to pay the defendant's costs
The claimant had no activity or assets; its only purpose was to pursue the claim. It had no independent means of satisfying any costs order made in the defendant's favour, but sought to rely upon its ATE policy to satisfy the threshold test. The defendant's position was that the ATE policy did not provide adequate protection for its costs.
Harlequin Property (SVG) Limited & Anor v. Wilkins Kennedy (a Firm)  EWHC 1122 (TCC) set out key principles when considering whether an ATE policy is capable of providing security. It highlighted that there may be provisions within an ATE policy which a defendant can point to that, in certain circumstances, would reduce or obliterate the security otherwise provided, but the court should treat such objections with care and the defendant's concern must be realistic, not theoretical or fanciful.
The Judge considered that the threshold test had been met as there was at least reason to believe that the claimant would be unable to satisfy, whether directly by itself or through its ATE insurance, a costs award made in favour of the defendant, for the following reasons:
- the ATE policy contained general exclusions that any claim could be abandoned, discontinued, stayed or dismissed as a result of the claimant either not having funds to continue or not being willing to commit funds to continue. Whilst the claimant had the benefit of a no-win-no-fee arrangement with its solicitors, it was still required to fund expenses and, if it could not do so, there was a risk that it would be forced to abandon the claim;
- the ATE policy's non-disclosure provision could give rise to an avoidance of liability on the part of the insurer because it was in relatively wide terms;
- there was a potential for the insurer to avoid the policy where there has been any fraudulent, false or misleading representation;
- the ATE policy did not confer or create any right enforceable under the Contracts (Rights of Third Parties) Act 1999, leaving the defendant with no direct right of claim against the insurer but rather reliant upon the claimant, a dormant company, to pursue a claim against the insurer for costs. In the absence of it doing so, the defendant would be left without any remedy;
- the insurer may terminate the policy if the insured fails to observe any material term of the policy or if the insured becomes bankrupt or insolvent during the period of insurance, in which event it would not be liable for any claim under the policy.
The Judge concluded that these risks were real and not fanciful and were ones the defendant should not have to take.
The discretionary test
On the issue of discretion, the claimant argued that granting security would stifle a genuine claim. Further, that it was not reasonable to expect shareholders to risk the limited assets they had in order to fund risky litigation. The Judge concluded that whilst it was not an impossible case to prove, it was so difficult he did not consider the claimant had a reasonable prospect of succeeding in it. Further, the Judge was mindful that the claimant shareholders did have funds available to provide security, even if that was not up to the full amount of the budgeted costs.
The Judge therefore awarded the defendant security to be made in two staged payments to cover (1) the incurred costs; and (2) the costs in relation to disclosure, witness statements and/or preparation for mediation, for an amount of approximately one third of the defendant's budgeted costs.
Subsequently, and having failed to make any payments into court, the claimant successfully applied to vary the order by way of a provision of a deed of indemnity from the ATE insurer in substitution for the payments in. The Judge concluded that the indemnity offered adequate security, but it was appropriate that it covered the full amount of the defendant's budgeted costs.
The decision highlights the challenges of relying upon ATE insurance to respond to security applications. It provides helpful guidance on the types of provisions within an ATE policy which would inhibit the ability to rely upon it, notably circumstances in which the insurer can avoid the policy and the inability for the defendant to pursue the insurer for its costs directly (risks the defendant should not have to bear). It also shows the court taking into account the possibility of shareholder funding when deciding whether to order security against an impecunious company. The subsequent provision of an indemnity from the insurer highlights what a party can offer as adequate security in circumstances where its ATE policy is insufficient.
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