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19 December 2017
A recent Court of Appeal decision confirms that the court can take account of a claimant's after-the-event (ATE) insurance policy when considering whether to make an order for security for costs: Premier Motorauctions Ltd v PricewaterhouseCoopers LLP  EWCA Civ 1872.
The central question will be whether the policy provides the defendant with sufficient protection in the event that an adverse costs order is made against the claimant. This will depend on the terms of the particular policy and the circumstances in which the insurer can refuse to make payment.
In the present case, the Court of Appeal was satisfied that it was appropriate to grant security, particularly as the claimants' ATE policy contained no anti-avoidance provisions.
The claimants were two companies in liquidation. They alleged that the defendants had conspired against the companies to force them into administration so that their assets could be sold at an undervalue for the benefit of the defendants.
The defendants sought an order for security for costs under CPR 25.12. The court has power to order security if:
The claimants argued that they should not have to provide security, as they had obtained ATE insurance for £5 million. However, as the defendants pointed out, the policy could be avoided in the event of non-disclosure or misrepresentation, and it did not contain any anti-avoidance provisions (such as a promise only to rely on any non-disclosure or misrepresentation if it is made fraudulently). Accordingly, it did not give the defendants the same protection as a payment into the court or bank guarantee or some form of indemnity from the insurers.
The High Court (Mr Justice Snowden) refused to order security, given the existence of the ATE policy. He said the question was whether there was reason to believe the ATE policy would not respond so as to enable the defendants' costs to be paid. In his view there was no such reason, since (in essence) he considered the prospect of avoidance for non-disclosure or misrepresentation purely theoretical. The defendants appealed.
The Court of Appeal allowed the appeal and ordered the claimants to provide security.
The court was satisfied that an ATE policy can be taken into account when considering security for costs applications. Although there was little appellate authority on the matter, the authority that did exist supported the proposition that an appropriately framed ATE policy could, in principle, be an answer to an application for security – at least where it gave a defendant "sufficient protection". Where such protection exists, a court would have no jurisdiction to order security as there would not be "reason to believe" the company would be unable to pay the defendant's costs if ordered to do so.
Importantly, however, the Court of Appeal stressed that the outcome of any security for costs application involving an ATE policy will depend on the terms of the particular policy. In this case, the court held that the cover provided did not give sufficient protection to the defendants. The evidence of the claimants' managing director was likely to be central to the case. If this evidence was not believed, it was likely that the claimants would lose and that they would be required to pay the defendants' costs. It was difficult for both the defendants and the court to know whether such an outcome would result in the ATE policy being avoided. Because of this lack of assurance, there was reason to believe that the claimants would be unable to pay the defendants' costs.
It should be noted that the court considered the ATE policy as part of examining whether it had jurisdiction to grant the order (ie whether there was reason to believe the claimants would not be able to pay the defendants' costs), and not as part of its discretion to grant or refuse an order once jurisdiction had been established. With regard to the exercise of discretion, it commented that once a court is satisfied that (i) the claimant is insolvent, (ii) there is jurisdiction to order that security be paid, and (iii) ordering security will not stifle the claim, it is normally appropriate to grant the application, and it could see no reason not to do so in this case.
For further information on this topic please contact Nick Chapman at Herbert Smith Freehills LLP by telephone (+44 20 7374 8000) or email (firstname.lastname@example.org). The Herbert Smith Freehills LLP website can be accessed at www.herbertsmithfreehills.com.
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