Legal costs are an unavoidable part of the dispute resolution process and often become a dominant issue as cases progress through the courts.
Generally speaking, the losing party has to pay at least a proportion of the winning party’s legal costs. It’s therefore important, before embarking on litigation, to consider how best to mitigate this risk.
Litigation funding and “after the event insurance” (ATE) are two of the main products available which can offload the risk of paying your opponents costs onto a third party.
The former generally involves a funder paying your legal costs (and, if you lose, those of your opponent), in return for a share of the proceeds if you win. By contrast, a party taking out an ATE policy will normally have to pay a premium themselves, in return for which the insurer will pay their opponents costs if they lose.
Whether litigation funding or ATE insurance is likely to be appropriate in any given case will depend on the circumstances, so parties are advised to obtain legal advice before making any decision.
Obtaining legal advice on the terms of an ATE policy is also highly important. This article will consider the recent case of Lewis Thermal Ltd v Cleveland Cable Co Ltd EWHC 2654 (TCC), which provides a welcome reminder that if the terms of an ATE policy are not appropriate, then the policy may not offer the desired protection.
Security for costs
Lewis Thermal Ltd v Cleveland Cable Co Ltd involved an application by the defendant for “security for costs” from the claimant.
This is a form of order whereby a party is required to lodge money with the court upfront, which will then be used to meet any costs order that the court ultimately awards. The courts can make such an order where there is reason to believe that a party would not be able to pay the other side’s costs.
Parties with ATE insurance will invariably seek to rely upon the existence of their insurance policy to persuade the court that they should not be required to lodge security for costs.
Since insurers normally have the funds to pay, the existence of a policy generally used to be enough to convince the courts that there was no need for the claimant to lodge security for costs.
Lewis Thermal Ltd v Cleveland Cable Co Ltd
However, in more recent cases the courts have taken a more active role in scrutinising the terms of ATE policies. After examining the claimant’s ATE policy in Lewis Thermal Ltd v Cleveland Cable Co Ltd, the court concluded that there were several scenarios in which the insurer might not have to pay.
For instance, the insurer was entitled to terminate the policy if the claimant could not afford to fund disbursements, became insolvent or on the grounds of non-disclosure/fraud/misrepresentation. The policy did not include what is commonly known as an “anti-avoidance clause”, a provision often inserted into ATE policies to prevent the insurer from terminating the policy. In addition, the policy did not create any enforceable third party rights against the insurer, which meant that the defendant would not have any direct right to the policy proceeds if the claimant fell insolvent.
These factors led the court to find that “the ATE insurance policy does not provide adequate security for the defendant’s costs.” In other words, despite the existence of the ATE policy, there was still reason to believe that the claimant would not be able to pay the defendant’s costs.
The court held that since the claimant’s claim was, in essence, a “speculative claim” with low prospects of success (and there was therefore a high likelihood that Lewis Thermal would be required to pay Cleveland’s costs) the court concluded that an order for security for costs was appropriate.
Lewis Thermal Ltd v Cleveland Cable Co Ltd confirms that the courts are prepared to scrutinise the terms of an ATE policy to determine whether it will ensure that the opposing party’s costs will be paid if such an order were to be made.
Parties interested in obtaining ATE insurance are therefore advised to seek legal advice before entering into a policy, to make sure that the terms would be satisfactory to the courts.