Deed of indemnity plus ATE enough for security for costs, but not to release solicitors from undertakings

Security for costs: Deed of indemnity would have been sufficient

A deed of indemnity from an after-the-event (ATE) insurer was a sufficient replacement for security for costs, the High Court has ruled, but it did not release their solicitors from undertakings given previously in lieu of an order for security.

Nicholas Vineall QC, sitting as a deputy High Court judge, said release could be appropriate, even if the new security was less attractive, where there was “some compelling consideration going the other way”.

Mr Vineall said the underlying claim in Recovery Partners GB and another v Rukhadze and others [2018] EWHC 95 (Comm) concerned allegations by the claimant companies of breaches of duty by three defendants arising out of the alleged diversion of an opportunity to provide lucrative services to the family of the deceased Georgian billionaire Arkadi Patarkatsishvili.

Following requests from the defendants for security for costs, the claimants’ solicitors, Brown Rudnick, instead gave an undertaking in February 2017 that the firm held £200,000 by way of security. A second undertaking was given in April 2017 for a further £366,000.

Having obtained the undertakings, the defendants did not make security for costs applications.

The claimants then secured ATE insurance with Hannover SE and Elite, indemnifying them for costs up to £2m, and a deed of indemnity from Hannover for a further £1m “to head off any arguments” about the adequacy of the ATE policy as security for costs.

The issue of whether ATE insurance constitutes an adequate replacement for security for costs came before the Court of Appeal last November. It ruled that it was not adequate where the ATE policy could be voided.

Mr Vineall found that there was a risk with the deed of indemnity that Hannover could pay the claimants under the ATE policy before any claim on the deed could be made, in which case the defendants might find themselves having to attempt to recover their costs in an insolvent winding up of the claimants.

Hannover, however, had offered to endorse the ATE policy to the effect that all monies paid out under it would be paid to the defendants’ solicitors, and that the claimants had offered to execute a deed of charge charging the ATE policy and its proceeds in favour of the defendants.

This meant that it was “impossible” to say that the security provided by the deed, read together with the ATE policy, would not provide sufficient protection, the judge ruled.

The solicitors then sought to be released from their undertakings due to a material change of circumstances. Mr Vineall said the burden was on them to show that it was “appropriate to do so”.

This was not to be treated as a de novo application for security, he said. “Here, two threatened applications for security were, in effect, compromised by providing security by a London solicitor’s undertaking backed by cash, and, those deals having been struck, the defendants incurred costs against the confidence that that security provided.

“What this application seeks to do is to wind back the clock and substitute for the security in fact given a different form of security. It does not seem to me to follow as a matter of logic that merely because the court might have accepted the deed and the ATE policy had they been available earlier this year, that it is therefore necessarily appropriate to allow them now to be substituted for the security previously given.”

The judge said “a London solicitor’s undertaking backed by cash” was “at the very top of the range of types of security for costs”, and a deed of indemnity combined with an ATE policy was “clearly less attractive”.

He explained: “There is inevitably more scope for argument. One example will suffice: suppose the claimants and defendants were minded to agree costs, but Hannover would not agree.

“The defendants would then be faced with the prospect of having to have to bring proceedings to show that the insurers’ agreement had been unreasonably withheld, or alternatively going to the time and expense of having the costs determined.

“At the same time, there may be circumstances in which it was appropriate to release an undertaking (or vary an order for security) despite the new security being marginally less attractive, because there was some compelling consideration going the other way, for instance significant hardship to the claimant if the substitution were not made.”

Mr Vineall identified four factors in making the decision: first, how long the old security has been in place and whether the costs which it secured have already been incurred – which here they had been.

Second was the extent of the difference (if any) between the quality of the old and new security.

Third was the strength of the explanation given for the claimant’s change of position. The judge said: “It is unclear whether or not the ATE policy and deed now offered could have been offered at an earlier stage: the reason given by the claimants to justify their change of position is simply that they would prefer to have the cash available to them.”

Fourth was whether or not, and if so to what extent, declining to permit the change would cause hardship or prejudice to the claimant or inhibit its ability to pursue its claim. Here, the claimants did not say that.

“The fourth factor seems to me to carry particular weight. The security has been in place for some time and no strong reason is given for revisiting and changing the existing arrangements, after the event, to something less attractive to the defendants.

“Weighing these factors, I find that the claimants have not demonstrated that it is appropriate that their solicitors be released from their undertakings. I therefore dismiss the application.”

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