Legal: Cost conscious

It is unlikely to have escaped readers’ attention that pursuing claims can be costly. Construction disputes in particular are often complex, with many factual and expert issues to be resolved – and this adds to the expense. Over the last 15 years or so an industry has grown up selling products intended to lighten the burden of funding disputes. Two such products are third-party funding and after-the-event (ATE) insurance

Third-party funding of litigation costs (usually for the claimant) is increasingly common. Finance is provided for an agreed return from the proceeds of the litigation. This return can be calculated in a number of ways, including by reference to a multiple of the costs funded or as a percentage of the sums successfully recovered in the litigation. It is unlikely to have escaped readers’ attention that pursuing claims can be costly.

Construction disputes in particular are often complex, with many factual and expert issues to be resolved – and this adds to the expense. Over the last 15 years or so an industry has grown up selling products intended to lighten the burden of funding disputes. Two such products are third-party funding and after-the-event (ATE) insurance. 

One can immediately see the attractions of this because it may mean a party who would otherwise be unable to pursue a claim can do so, and it avoids the potentially significant cash flow impact of litigation. 

“Third-party funding does not usually cover the risk to the claimant of losing a case and becoming responsible for paying the defendant’s costs”

Third-party funding does not usually cover the risk to the claimant of losing a case and becoming responsible for paying the defendant’s costs. This is where ATE insurance comes in.

An ATE insurance policy is purchased after the legal dispute has arisen and covers the adverse cost risks inherent in litigation. It typically covers the insured’s own disbursements and liability to pay the other side’s legal costs if the insured loses. 

The premium for ATE insurance can be deferred to the conclusion of the case (when a claimant would hope it could be funded by the proceeds of a successful claim). Alternatively, the premium can be contingent on success, so that it is payable only if the case is won. The premium can also be staged (even if it is contingent) so that it increases as the matter progresses to reflect the insurer’s increased exposure. 

Questions arise as to whether ATE insurance can defeat a security for costs application. An order for security for costs offers protection to a defendant from the risk of the claimant being unable to pick up the legal costs of a successful defence. If such an order is made then normally the claimant will be obliged to pay into a secured account a sum to cover the defendant’s potential costs and, if it fails to do so, the claim cannot proceed. A whole host of factors will be considered by a court in determining whether or not to make such an order. 

In the recent case of Lewis Thermal Ltd vs Cleveland Cable Co Ltd, the court explored how ATE insurance sits with a security for costs application. The proceedings related to claims following the supply of defective cables that were installed in various John Lewis and Waitrose stores. It was alleged that this supply of defective cables had caused the relevant contractor (Guardian) to become insolvent, as it had then lost business from its main client. The claim for this loss of business was valued at £8m. 

Cleveland made an application for security for costs, as Lewis was a single-purpose vehicle incorporated to pursue the claim (and to which Guardian’s claims had been transferred). Lewis relied on its ATE insurance as security. Cleveland argued the ATE insurance provided insufficient security, as it provided no direct right against the insurer. Further, there was a risk the insurer could avoid payment, as the policy excluded cover in cases of failure to disclose material facts, fraud, misrepresentation and insolvency.

The court held that these issues meant there was an unacceptable risk for Cleveland that if the ATE policy was relied on and it won the dispute, its costs would not be paid. The court also thought the claim appeared speculative and that it was therefore appropriate to order security for costs, even if this stifled the claim. Lewis was ordered to make a payment to cover any adverse costs award.

Two months later the parties came back before the court. The court was prepared in this instance to vary its order to allow the security to take the form of a deed of indemnity from the ATE insurer in favour of Cleveland for the full amount of its budgeted costs, rather than Lewis having to make the payment into court.

It is clear that ATE insurance and third-party funding offer a means for claimants to gain greater access to justice, ease their financial burden during litigation and protect against potential costs liabilities. They may not prevent an impecunious claimant from being subject to a security for costs order that could stop the claim progressing if it cannot be funded. However, if the ATE insurance contains a provision for the insurer to give a deed of indemnity direct to the defendant, it will carry greater weight in any security for costs application. As the saying goes, “the devil is in the detail”. 

Steven Carey is head of the construction, engineering and projects team at Charles Russell Speechleys