Non party costs in the Supreme Court II

The last post considered the search for principle in the Supreme Court decision of Travelers Insurance Company Ltd v XYZ [2019] UKSC 48 by Lord Briggs concerning non party costs orders against liability insurers. Having explained the context and the principles to be applied he then turned to consider the factual matrix of the case the court was concerned with.

The key feature of the present case is that every one of the successful claims for which the claimants seek a non-party costs order is wholly uninsured. The uninsured claimants can have had no real expectation, if successful, of being paid their costs by the insurers, unless those costs were incurred as a result of some unjustified intervention in their claims by the insurers. This is sufficient on its own to take them out of the proper ambit of the Chapman principles, and to make it necessary to ask whether Travelers’ involvement in the defence of the uninsured claims amounted to intermeddling. The question is not whether Travelers became the real defendant in each of them, but whether its level of involvement in them was justified and, even if not, whether it caused the incurring by the claimants of the relevant costs.

This was unpromising ground for the claimants and it is to be noted that he emphasised the requirement of causation.

In the present case every one of the claimants against Transform began their claims without knowing whether they were covered by insurance, and continued them in face of increasingly depressing evidence about Transform’s impending insolvency. They all took the risk of asymmetric costs exposure and, for a majority of them, namely the respondents, that risk came to pass, as was revealed when Transform voluntarily disclosed the limits of its insurance cover in June 2014, followed by Transform going into insolvent administration in 2015. By contrast the lucky minority made a satisfactory costs recovery, funded by Travelers, when their cases were settled after mediation in August 2015.

He then demolished the reasoning of the High Court and the Court of Appeal on the point of asymmetry/reciprocity:

In my view the reliance placed by the courts below on asymmetry or lack of reciprocity as a factor tending to justify a s 51order against Travelers was misplaced. My reasons follow. First, leaving aside the incurring of costs by the uninsured claimants, the asymmetry in risk was not itself in any sense the result of any aspect of the intervention in, or conduct of, the defence of the uninsured claims by Travelers. It arose from the combination of the facts that Transform was insolvent, had insurance for only some of the claims, excluding those of the respondents, and that the claimants’ liability for and therefore entitlement to costs was several-only, and extended to the prosecution of the common issues in the test cases. They chose, no doubt for good reason, to undertake that several-only costs burden regardless whether their claims were insured, taking the risk that they would not recover their outlay if they were not, even if successful.

One consequence of the several-only costs liability of each of the claimants is that the costs position of each of the claimants needs to be  looked at separately. This is so notwithstanding the fact that, behind the scenes, the claimants may have used common solicitors, CFAs and ATE insurance in a way which greatly modified both their personal costs exposure, and the entitlement of the common solicitors to make a satisfactory costs recovery. Looked at separately, each claimant had either an insured or an uninsured claim against a common insolvent defendant, with all the consequences in terms of reciprocity which that entailed.

The only sense in which anything done or not done by Travelers may be said to have contributed to that asymmetric outcome for the uninsured claimants was that the solicitors jointly instructed by Travelers and Transform played an advisory role in Transform’s decision not to disclose the limits of its insurance cover earlier, when the uninsured claimants might have abandoned their claims, and successfully to resist an order for disclosure in 2013. That advice was given in good faith without a perception by the solicitors that there might be (as the judge held that there was in fact) a conflict between the interests of Transform and Travelers in whether to make that disclosure. Still less was the advice motivated in fact by a desire to dilute Travelers’ costs risk in the defence of the common issues. It was not in any recognisable sense an inappropriate intervention by Travelers in the defence of the uninsured claims, as distinct from the insured claims. The advice was given in relation to the claims against Transform as a whole and was plainly part of the conduct of the defence to the insured claims which Travelers was entitled to control (in the Groom v Crocker sense) just as much as it was part of the conduct of the defence of the uninsured claims. Of course Transform, Travelers and their jointly instructed solicitors knew that the Worried Well claimants’ claims were not insured, nor were claimants’ claims falling outside the insurance policy periods, but disclosure could not practicably have been made to the uninsured claimants alone, since all the claimants were represented by common solicitors.

Both the judge and (but with less assurance) the Court of Appeal regarded it as right for Travelers to have to take responsibility for that advice. Whether or not that is so, it was advice which fairly reflected Travelers’ rights as insurer, as was in due course confirmed by the judge, and noted as something not properly contributory to the  making of a s 51order in the Cormack case. It was not conduct which amounted to unjustified intermeddling in the uninsured claims for the purposes of s 51 .

 He also made some further observations on causation:

I have noted above how firmly the Court of Appeal in the Cormack case endorsed the requirement for an applicant under s 51to demonstrate a causative link between the incurring of the costs sought to be recovered from the non-party and some part of the conduct of the non-party alleged to attract the s 51 jurisdiction. That requirement is in my view rightly imposed. Auld LJ regarded it as part of the exceptionality requirement. It could equally be seen as going to the justice, or otherwise, of making the order. If the costs would still have been incurred if the non-party had not conducted itself in the relevant manner, why should it be just to visit the non-party with liability for them?

The causation requirement was not the subject of challenge on this appeal. It does not appear to have featured in the other Chapman cases, but their facts suggest that the relevant costs ordered to be paid would not have been incurred, but for the exceptional conduct relied upon. In cases such as the present, where it is the intermeddling test rather than the real defendant test which falls to be applied, the formulation of that test by Phillips LJ in the passage in the Chapman case quoted above clearly incorporates a need to demonstrate causation, since it is the costs attributable to the intermeddling that the meddler is ordered to pay.

The judge found that there was a causative link between the non-disclosure of the limits of the cover and the incurring of costs by the uninsured claimants. But for the reasons already given the nondisclosure was not itself conduct by Travelers in relation to the uninsured claims which falls within the necessary requirement for unjustified intermeddling. It remains to consider whether the other aspects of Travelers’ conduct in relation to the uninsured claims amounted to unjustified intermeddling and, if so, whether it had any causative consequence in relation to the incurring of costs by the uninsured claimants.

Having made an exegesis of the law in this area, he then moved to draw the threads together. He identified a number of reasons why a non party costs order should not be made :

It may be convenient to draw together the threads of this rather long analysis into some concluding propositions. First, the underlying question, whether the non-party has either become the real defendant in relation to an insured claim, or intermeddled in an uninsured claim, is fundamental to the exercise of the s 51jurisdiction, in insurance cases. It is the conduct of the non-party which matters, rather than the mere rarity of the case.

Secondly, the Chapman principles are useful guidelines for establishing whether the liability insurer has become the real defendant in all but name, in a case where some part of the claim (including the claim for costs) is or may lie outside the limits of cover, so that the insured has at least a prima facie joint interest with the insurer in the outcome of the litigation.

The Chapman principles are a useful starting point, but they are not the only principles which can be engaged, noting that “intermeddling” was conceptually distinct from being a “real party”:

Thirdly, the Chapman principles are not likely to be of assistance where the question is (as here) whether the liability insurers crossed the line in becoming involved in the funding and conduct of the defence of wholly uninsured claims, as opposed to claims where there is limited cover. In such cases the insurer may cross the line by conduct falling well short of total control, and without becoming the real defendant, if the insurer intermeddles in the uninsured claim in a manner which it cannot justify.

But, fourthly, where there is a connection between uninsured claims and claims for which the insurer has provided cover, it may well be that the legitimate interests of the insurer will justify some involvement by the insurer in decision-making and even funding of the defence of the uninsured claims without exposing the insurer to liability to pay the successful claimant’s costs. This is just such a case because of the very close connection between insured and uninsured claims, raising common issues to be tried together in test cases in group litigation, and the limited nature of Travelers’ involvement in the uninsured claims.

This conclusion was key: the issues were intertangled, and so was the defence funded by the insurers:

Fifthly, causation remains an important element in what an applicant under s 51has to prove, namely a causative link between the particular conduct of the non-party relied upon and the incurring by the claimant of the costs sought to be recovered under s 51 . If all those costs would have been incurred in any event, it is unlikely that a s 51 order ought to be made.

Again causation came to the fore:

Sixthly, the non-disclosure of limits of cover by the defendant at the request of the insurer is unlikely to amount to relevant conduct, for as long as the law continues to make that non-disclosure legitimate.

Seventhly, asymmetry or lack of reciprocity in costs risk, as between the uninsured claimant and the defendant’s insurer, is unlikely on its own to be a reason for the making of a non-party costs order against the insurer where, as here, the asymmetry arises because a claimant sues an uninsured and insolvent defendant and incurs several-only costs liability in group litigation.

Applying the principles/conclusions to this case he noted:

Applied to this case, those conclusions mean that this appeal should be allowed. This is because, of the three elements of the conduct of Travelers which the judge regarded as crossing the line, the first (non-disclosure) was not unjustified intermeddling, although it did cause those costs to be incurred, while the second and third (decision-making about offers and admissions), even if amounting to unjustified intermeddling, which I doubt, plainly had no relevant causative consequences. The Court of Appeal’s alternative route to the judge’s conclusion, based essentially upon the asymmetry point, was in my view wrong for the reasons already given.

In a concurring judgment, Lord Sumption noted:

We are concerned on this appeal with the position of a liability insurer exercising a contractual right to direct the conduct of the defence on behalf of his assured. The relationship between a liability insurer and his assured has a number of specific features which are not necessarily common to other cases in which costs orders are sought against non-parties. In the first place, although the insurer is potentially liable to meet a third party’s claim against his assured, that liability is owed only to his insured and not directly to the third party, subject to special statutory regimes such as that applicable to insolvent assureds under the Third Parties (Rights against Insurers) Act 2010. In this respect English law differs from many civil law systems which allow direct actions against insurers as a matter of course. Secondly, the insurer is not even liable to his assured during the litigation, since his liability arises only once the assured’s liability has been ascertained by judgment, award, admission or agreement. Thirdly, the insurer’s contractual right to direct the conduct of the litigation, which is an almost invariable incident of liability policies, is a form of compulsory agency. It is a right to direct it in his assured’s interest, and not his own, even though their interests will usually coincide. The solicitor whom he appoints is the assured’s solicitor, who owes all the usual professional duties to the assured and is entitled to look to the assured for his fees, notwithstanding that his instructions come from the insurer.

These features, and particularly the last, mean that the insurer cannot be regarded as the real defendant. He is simply in a position where (i) by virtue of his contractual obligations to the assured, he is liable to suffer a detriment if the assured loses; and (ii) by virtue of his contractual right against his assured, he is entitled to direct the conduct of litigation in his assured’s interest. Both are common to other relationships which non-parties may have with a defendant without necessarily being at risk in costs, for example his solicitor or other litigation agent in case (i), or a liquidator bringing a claim in the company’s name in case (ii). Neither factor is any concern of the claimant, whose concern is only with the defendant. The claimant may hope or even expect the defendant to be insured. But he has no legally recognised right to proceed on that basis and must accept the risk, commonplace in litigation, that he is not.

That leaves unjustifiable intermeddling as the only basis on which a liability insurer might be at risk of having a costs order made against him. Cases in which a costs order may be made against a liability insurer on this basis are likely to be rare. What may make a non-party’s involvement in litigation an “unjustified intermeddling” is the absence of any interest in the litigation recognised by the law. That need not necessarily be a legal interest. But a liability insurer has an obvious legal interest in the performance of his contractual duties under the policy and the exercise of his contractual rights. Of course, that interest is limited to the defence of insured claims and different considerations may arise if he steps outside that role. But, as the present case illustrates, where insured and uninsured claims are at issue in the same litigation, the proper defence of insured claims may involve steps which directly or indirectly affect uninsured claims. This is an area in which a person conducting or directing the conduct of litigation is entitled to a large margin of judgment and hindsight is not usually an adequate tool for assessing how he exercises it. If he acts in good faith in the interest of the assured qua the defendant to insured claims, he should not incur liability in costs. As at present advised, I would expect this to be equally true of the case where the potential liability of the assured is subject to a limit of cover which is exceeded, but that is not an issue which needs to be examined on this appeal because it does not arise on the facts.

In summary a lengthy judgment: it might be summed up by noting that non-disclosure of insured or uninsured status, is not a matter that the claimant had any right at law to know, that where common issues are to be tried the insurer will have  a legitimate interest in defending uninsured claims because of the “knock on” effects to insured claims, and the lack of a causal link between conduct of which complaint is made and the incurrence of costs, will prove fatal.

In terms of its wider application, what strikes me as significant is the renewed emphasis on causation: and it is “but for” causation which is clearly being espoused by Lord Briggs. This conceptually aligns the non party costs jurisdiction with the wasted cost jurisdiction, where “but for” causation has successfully defeated any number of otherwise meritorious wasted costs applications. It also follows that in many contexts causation will be the key argument in defeating an application for non-party costs.

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