In Geophysical Service Centre Company Ltd v Dowell Schlumberger (Middle East) Inc ( EWHC 147 (TCC)) the defendant applied for security for costs, as is common when a claimant is overseas and there is doubt over its ability to meet an award of costs made against it if it failed at trial. It was common ground that the burden was on the defendant to show that there was reason to believe that the claimant would be unable to pay an adverse costs order; this was the first hurdle for the defendant to overcome. Unless the threshold conditions set out in Civil Procedure Rule 25.13(2) are satisfied, the court will not have jurisdiction to make an order for security for costs. If the jurisdiction does arise, the decision to make an order for security for costs is discretionary.
There was evidence that trading conditions had been difficult for the claimant. However, it had the benefit of an after-the-event (ATE) insurance policy. It asserted that because of the ATE cover, there was no reason to believe that it would be unable to pay. The defendant argued that an ATE policy could never be good security because of the inherent risk that an insurer may avoid or cancel the policy.
This point was most recently considered by the judge in Michael Phillips Architects Limited v Rilkin ( EWHC 834). He held that the ATE policy was not sufficient to resist a security for costs application and found that:
"it is necessary where reliance is placed by a claimant on an ATE insurance policy to resist or limit a security for costs application for it to be demonstrated that it actually does provide some security. Put another way, there must not be terms pursuant to which or circumstances in which the insurers can readily but legitimately and contractually avoid liability to pay out for the defendant's costs."
In the present case, the judge found that depending on the terms of the policy in question, ATE policy terms may be adequate to satisfy the court that the claimant can pay the defendant's costs. He therefore had to form a view on the meaning of the policy and how readily it could be avoided legitimately and contractually. The ATE policy in this case was similar to that in Rilkin, but the policy and circumstances differed in material respects.
The main argument for the defendant was the risk that the insurer could seek to avoid the policy. Under the policy, the insurer was entitled to avoid if there was a fraudulent non-disclosure or misrepresentation. However, the claim was a breach-of-contract claim and not a claim relating to fraud. The defendant tried to argue that because the claim was partly advanced on a series of representations made by the defendant to the claimant, the court would have to make a finding on those representations; if the court found against the claimant, the insurer could seek to avoid.
The judge found that this material raised no more than a theoretical chance that the insurer might seek to avoid. He stated that it was not the defendant's contention that the claim was fraudulent or a sham, and that there was a giant step between a finding that evidence is incorrect (and to be rejected) and a finding that it was fraudulent.
He also considered that there was only a theoretical chance that breach of ATE policy conditions could lead to avoidance, because the conditions were not onerous and the claimant had no commercial interest in breaching the conditions. The significant difference between the policy in Rilkin and the one in this case was the wording of the cancellation clause. The judge stated that in the present case, the insurers would be liable to provide an indemnity for the defendant's costs that had been incurred before the date of cancellation. In the event that the insurer cancelled the policy, the defendant would be entitled to return before the court and apply for security.
Interestingly, the judge considered that the court's starting position should be that a properly drafted ATE policy provided by a substantial and reputable insurer is a reliable source of litigation funding. It was recognised in his decision that the funding of litigation by ATE policies is, and has for some years now, been a central feature of the ability of parties to gain access to justice. He also gave some weight to the fact that there was a longstanding relationship between the claimant's solicitors and the insurer, which would make it less likely that the insurers would seek to avoid the policy on spurious grounds. These were matters to be weighed in the balance.
Unsurprisingly, the judge therefore concluded that there was no reason to believe that the claimant would be unable to pay; the defendant fell at the first hurdle and security for costs was not ordered.
This is positive news for claimants that rely on ATE insurance as a means of litigation funding. While the rules in relation to recovery of ATE premiums changed as of April 1 2013, ATE policies will continue to have a part to play. The case highlights the need for a robust policy that is suitable for the claimant's purpose. There are many examples of the court ordering security despite an ATE policy.
Defendants should consider an ATE policy carefully and determine whether there are circumstances in which there is a real risk that an insurer could avoid the policy. This decision turned on its facts. As the previous line of case law shows, the wording of an ATE policy is often weighted in the insurer's favour and may then afford little protection to defendants.
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