Security for Costs: Is ATE Insurance Good Enough?

12/01/2017

The Court of Appeal handed down judgment in Premier Motorauctions Ltd (in liquidation) v PricewaterhouseCoopers and Lloyds Bank [2017] EWCA Civ 1872 on 23 November, allowing an appeal against the decision of Snowden J ([2016] EWHC 2610 (Ch); [2017] 4 All ER 243).

The case concerns whether the ATE insurance obtained by the claimant companies (both in liquidation) is sufficient to resist the applications by the defendants for security for costs. As is well known, before a Court can order security where the impecunious company condition is relied upon, it must be satisfied that there “is reason to believe that it will be unable to pay the defendant’s costs if ordered to do so” (the jurisdictional threshold), and that, having regard to all the circumstances of the case, that it is just to make the order (the discretionary limb). The claimants took a stand on their ATE policies, which the defendants attacked principally on the basis that unlike traditional forms of security such as cash and guarantees, like any other form of insurance without anti-avoidance provisions, the policies included provisions entitling the insurers to avoid cover in certain circumstances.

At first instance, Snowden J concluded that the insurance procured by the claimants was sufficient to resist the applications for security, on the basis that, having regard to terms of the policies, the issues in dispute between the parties and all the circumstances, there was no reason to believe that the policies would not respond, and that therefore the jurisdictional threshold had not been crossed. The decision followed a clear line of recent first instance decisions which can be traced back to the decision of Stuart-Smith J in Geophysical Service Centre v Dowell Schlumberger (ME) Inc [2013] EWHC 147 (TCC), where the threshold question in the context of ATE was considered to be not whether the assurance provided by an ATE policy is better security than cash or its equivalent, but whether there is reason to believe that the claimant will be unable to pay the defendant’s costs despite the existence of the ATE policy.

The Court of Appeal disagreed with the conclusion reached by Snowden J, on the basis that whilst ATE policies could in principle be sufficient, they were of the view that the jurisdictional threshold had been crossed (and that the exercise of discretion leaned in favour of granting security), because the ATE policies in the present case did not provide the defendants with “sufficient protection”, principally on the grounds that given there was no general anti-avoidance provision, there was a risk that if the evidence of the claimants’ key witness was disbelieved the insurers could avoid coverage.  In his lead judgment, Longmore LJ was of the view that Geophysical could be distinguished on the ground that in that case there was an anti-avoidance provision in the ATE policy.

The decision is an important one because it is the first time that the Court of Appeal fully considered the question of whether ATE insurance can be sufficient to prevent the jurisdictional threshold from being crossed. Although the decision makes it clear that ATE insurance can be taken into account at the jurisdictional stage, by relegating Geophysical to the status of having been correctly decided on the basis of an anti-avoidance provision, and bearing in mind that the concerns identified as to lack of knowledge or certainty as to avoidance risks will apply to many cases, any standard form ATE policy, without anti-avoidance provisions, may not be good enough to resist an application for security.

The implications of the decision are likely to be wide-ranging, as anti-avoidance provisions and other measures such as deeds of indemnity are costly. As a result, the decision is likely to embolden defendants to make challenges to ATE insurance, and have significant implications for claims brought by office holders, the third party funding landscape, the use of ATE policies, and, most importantly, access to justice.

Hugh Sims QC and Jay Jagasia were instructed by Hausfeld & Co LLP on behalf of the claimants, both at first instance and in the Court of Appeal.

Click here to read the full judgment.