Costs against non parties

With policy reasons around access to justice supporting the after the event insurance market, how at risk are insurers that support failed litigation.

While policy decisions around access to justice play a central role in supporting the existence of an ATE insurance market (so far undiminished by the introduction of Qualified One Way Costs Shifting) it is worth reviewing the extent to which ATE insurers might be made liable for costs when litigation they have supported, if not actively maintained, fails.

Section 51(3) of the Senior Courts Act (formerly the Supreme Court Act), 1981 says:

“The court shall have full power to determine by whom and to what extent the costs are to be paid.”

This short sentence gives the courts of England and Wales a very wide discretion to order costs against a non-party, such as an ATE insurer. Ordinarily the rule is that costs “follow the event” so absent particular reasons to depart from that general position, the party that loses the case pays the legal costs of the party that wins. The amount of those costs is assessed by the court if it cannot be agreed between the parties.

But what happens if the losing party who brought the claim is insolvent or without sufficient assets to cover the costs liability? There are growing numbers of instances where a nominal litigant is supported in the litigation by an interested third party, for example subrogated actions pursued by insurers, or an after the event insurer. In such cases where third parties have maintained the litigation, they can be made subject to a costs order under section 51(3), where it is considered "just and equitable" to do so.

Consider too the position of the defendant who, facing a claim, may want to assess whether an application should be made for an order that the claimant provide security for costs. Is the existence of an ATE insurance policy sufficient security when it might be cancelled by the insurer if it deems the conditions of the policy have not been complied with? How can the defendant effectively assess the extent to which an ATE policy might be relied on either to defeat an application for an order for security for costs or to provide comfort that the defence costs are sufficiently covered? How is the ATE insurer to be treated (as far as costs against a non-party is concerned) if the claim fails, and what happens if the ATE insurer avoids the policy after the defence have racked up significant costs? To what extent might the ATE insurer be made the subject of an order under section 51 in these circumstances?

In Murphy v Young (1997) the court was persuaded that the legal expense insurer ought not to be made the subject of an order for costs as it would require the insurer pay costs over and above the indemnity it had contractually agreed to pay. In later cases, Samuel v Swansea County Council (2008) and England v Burnley Health Care and Amicus Legal (2007), County Court judges declined to make costs orders against the supporting insurers, accepting that in each case the insurers had not exercised sufficient control over the unsuccessful litigation to justify them being lumbered with a liability for costs.

Compare those decisions to Curtis v Taunton Deane Borough Council where a costs order was made against the ATE insurer after the claimant had effectively abandoned a claim, ceased instructing his lawyers and was untraceable.

Bear in mind that the circumstances of cases will vary enormously and though in the past some arguments set up to defeat applications under section 51 have been successful, they do not guarantee the same outcome on different facts. A court is not bound to accept the arguments of the ATE insurers that their obligations are contractual and limited any more than it might accept that it was in order for the ATE insurer to repudiate or avoid a policy and thereby hope to escape a liability under section 51. Crucially, it may not be possible for the insurer to assert that it lacked control of the litigation when the policy terms provide for it to be kept in the loop and have the last word.

In Symphony Group v Hodgson (1993) the Court of Appeal said:

"The procedure for the determination of costs is a summary procedure, not necessarily subject to all the rules that would apply in an action… in the summary procedure for the determination of the liability of a solicitor to pay the costs of an action to which he was not a party, the judge's findings of fact may be admissible. This departure from basic principles can only be justified if the connection of the non-party with the original proceedings was so close that he will not suffer any injustice by allowing this exception to the general rule”

The case set down some non-exhaustive principles that should apply when the courts are looking at making a costs order against a non party pursuant to section 51 (3). It also identified categories of cases in which orders had been made stressing that the categories were neither rigid nor closed. The principles are:

  • An order for payment of costs by a non party will always be exceptional
  • An application for payment of costs by a non-party should normally be dealt with by the trial judge
  • The procedure for determining costs is a summary procedure, not necessarily subject to all the rules that would apply in an action.

Generally therefore the following features may justify a costs order against an ATE insurer:

  • If the insurers determined that the claim would be fought
  • If the insurers funded the litigation
  • If the insurers had the conduct of the litigation
  • If the insurers fought the claim exclusively, or in the alternative, if they fought it predominantly to defend their own interests
  • If the litigation failed in its entirety

While the courts will continue to consider the making of a costs order against a non-party a matter of exception, there remain real prospects for the rights cases, on their particular facts, to support the making of such orders. Strategically, it will be important for defence lawyers and their clients to keep in mind the nature of the assessments that the insurers standing behind the claimant may be undertaking and to talk them at appropriate points during litigation to ensure they understand the risks of a section 51 application.

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Every piece of content we create is correct on the date it’s published but please don’t rely on it as legal advice. If you’d like to speak to us about your own legal requirements, please contact one of our expert lawyers.

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