This article was first published in Insurance Day on 5 July. To view a copy, please click here, the article is on page 7.

In Deleclass Shipping v. Ingosstrakh Insurance [2018] EWHC 1149 (Comm), the Commercial Court considered two security for costs applications in insurance litigation. In particular, it considered (1) what is expected of a defendant who alleges that the claimant has not made full and frank disclosure of available funding, (2) whether failing to pay an arguable claim on a policy may be treated as a factor causing the claimant’s impecuniosity (and thus militating against an order for security), and (3) whether a defendant may expose itself to an order to provide security by adopting a third party’s claim defensively.

Background

The Claimants were the owner and manager of the vessel “SIDERFLY”, which sank in 2013. The Defendant insurer accepted that the vessel was a constructive total loss under the policy but declined to indemnify the Claimants because a third party had intimated that it was the assignee of the insurance proceeds.

The Claimants commenced proceedings against the Defendant, seeking the policy proceeds. The Defendant issued a Part 20 claim, adding the Third Party who had asserted its entitlement, and seeking a declaration of non-liability to the Third Party. In its counterclaim, the Third Party alleged that it was indeed entitled to the policy proceeds.

Following the Claimants’ Reply – in which the Third Party’s assignment documentation was alleged to be fabricated – the Third Party failed to respond in the proceedings. The Defendant obtained an ‘unless’ order to the effect that, unless the Third Party responded, its defence and counterclaim would be struck out.

Failing any further response from the Third Party, its pleadings were struck out. However, on the same day, the Defendant served a Rejoinder in the main action in which it positively advanced the Third Party’s case as its own (viz.that the Third Party was entitled to the proceeds). The Defendant amended its Defence to like effect.

Accordingly, the Claimants’ claim was denied by the Defendant, and the Court had to consider the parties’ applications for security for costs (made prior to the removal of the Third Party).

The Defendant’s Application

The Defendant’s application was pursuant to CPR 25.12(1) “…for security for his costs of the proceedings…” – estimated to be more than £400,000 – and relied on the CPR 25.13(2)(c) ground that each Claimant was “…a company…and there is reason to believe that it will be unable to pay the defendant's costs if ordered to do so…”.

The parties disputed whether the Court should exercise its discretion to order security. The Claimants argued that, if required to provide security, they would be unable to do so, such that their claim would be stifled. Moreover, they contended that, having lost their only substantial asset when the vessel sank, the Defendant’s failure to pay under the policy was itself a cause of their impecuniosity. The Defendants denied that they had caused the impecuniosity, and alleged that the Claimants had not made full and frank disclosure of their ability to obtain funds.

Deputy High Court judge Andrew Henshaw Q.C. declined to infer that the Claimants’ evidence had not been full and frank. Such an inference would be unfair in circumstances where no specific arguments to that effect had been made prior to the hearing. At [59], he said that “…Whilst the onus is on the claimant to make out its case of stifling on the evidence, I find it hard to see any good reason for a tactic of withholding objections until the last possible moment, with the result that the claimant is not only unable to provide any evidence in response but unable even to take proper instructions…”. On the evidence, the Court was satisfied that the Claimants had limited assets and no real prospect of obtaining funds to provide security.

As to whether the Defendant could be said to have caused the Claimants’ impecuniosity, this called for consideration of one of the particular security for costs factors identified in Sir Lindsay Parkinson & Co v. Triplan [1973] Q.B. 609, namely “…whether the company's want of means has been brought about by any conduct by the defendants, such as delay in payment or delay in doing their part of the work…”.

The Defendant argued that this factor applies only where either (a) the claimant can show that it has a strong case on the merits, or (b) the defendant has caused the claimant’s impecuniosity in some way unrelated to the subject matter of the case. However, this was rejected by the judge, who held, at [29], that “…such an approach would make the factor virtually redundant because it would only apply either in the very unusual circumstances where some extraneous action by the defendant had caused the claimant impecuniosity or where the claimant could show a very clear case on the merits…”. Thus, it suffices that “…the claimant has an arguable case on the merits and the evidence demonstrates a causal link between the defendant's alleged non-payment and the claimant's impecuniosity…”. At [87], the judge concluded that it was “…likely that non-payment of the insurance claim has materially contributed to the claimants' lack of means …”.

Having concluded that an order for security would probably stifle the claim, and that the Claimants were not unfairly using their impecuniosity, the Court decided that it would not be just to require security.

The Claimants’ Application

The Claimants had applied for an order that the Defendant provide security for their additional costs of having to enforce any costs order in Russia. However, as CPR 25.12(1) only provides for “…A defendant to any claim…” to apply for security, this raised the question of whether, by having “…chosen to adopt that claim [the counterclaim of the Third Party] wholesale in an apparent bid to avoid having to pay out at all in respect of the loss…” (at [90]), the Claimants were effectively now defendants to “any claim”.

At [96]-[98], Mr. Henshaw Q.C. decided that there was no jurisdiction to make such an order. Although the assignment claim of the former Third Party was a “claim”, the Defendant had adopted it purely by way of defence to the Claimants’ claim.

Conclusion and Implications

The Court accordingly confirmed that (1) allegations of a failure to make full and frank disclosure must be particularised in good time for the claimant to have fair opportunity to respond, (2) an insurer’s failure to pay an arguable claim may itself cause/contribute to the claimant’s impecuniosity, and (2) a party adopting a third party’s claim defensively will rarely be vulnerable to an order to provide security. Whilst the third point arises rarely, the first two will often warrant careful consideration where an insurer seeks security for its costs of defending a claim.

Mark Stiggelbout of Quadrant Chambers acted on behalf of the Claimants, instructed by Fanos Theophani and Natalie Johnston of Clyde & Co.