TGA Chapman Ltd v Christopher

Under Supreme Court Act 1981, section 51, a non-party costs order requires exceptional circumstances which make the order reasonable and just. A liability insurer may be ordered to pay costs where it funds, controls and directs an unsuccessful defence solely to protect its own interests. The assessment is made against the full range of litigation, not only ordinary insurance practice.

A contractual limit on the insurer’s indemnity is relevant but does not bar an independent costs liability under section 51. A settlement of the insured’s liability does not prevent such an order where payment of costs would discharge the insurer’s own liability rather than reduce the contractual indemnity.

The claimants recovered damages and costs against an impecunious defendant for negligently causing a fire. His liability insurers had exclusive control of the defence under a policy limited to £1 million. The insurers settled the defendant’s liability for that amount, while the claimants reserved their right to seek a non-party costs order.

His Honour Judge Zucker QC, sitting in the High Court, made an order under section 51 of the Supreme Court Act 1981 requiring the insurers to pay the claimants’ costs. The insurers appealed. The central questions were whether the circumstances were exceptional enough to justify an order against a liability insurer and whether the policy limit or settlement prevented it.

1. Appeal dismissed unanimously. Lord Justice Phillips gave the leading judgment, with which Lord Justices Waller and Mummery agreed. The insurers were properly ordered to pay the claimants’ costs under section 51 of the Supreme Court Act 1981.

2. A non-party costs order requires exceptional circumstances making the order reasonable and just. Exceptional does not mean unusual within the insurance industry. It means unusual against the whole range of litigation before the courts. It was rare for litigation to be funded, controlled and directed by a third party acting entirely for its own interests.

3. The insurers had decided to contest the claim, funded and controlled the defence, and pursued it solely to avoid or reduce their own contingent liability. The insured had no assets and no separate interest in resisting a settlement. The defence wholly failed. In substance, the insurers were the defendants in all but name. Those circumstances made this a paradigm case for exercising the section 51 discretion.

4. The £1 million contractual limit was a relevant discretionary factor, but it was not conclusive. A section 51 order imposed an independent liability arising from the insurers’ conduct of the litigation; it did not rewrite the policy. Exposure beyond the indemnity limit was not inherently unjust.

5. The settlement did not defeat the application. A costs payment under section 51 would have discharged the insurers’ own liability to the claimants, rather than reduced their obligation to indemnify the insured. The claimants could therefore have recovered both costs under section 51 and the policy limit through the Third Party (Rights against Insurers) Act 1930 had there been no settlement.

• Court of Appeal (Civil Division): dismissed the insurers’ appeal and upheld the non-party costs order ([1998] 1 WLR 12).
• High Court, Queen’s Bench Division: His Honour Judge Zucker QC made an order under section 51 of the Supreme Court Act 1981 requiring the insurers to pay the successful claimants’ costs. The lower-court citation is not stated in the judgment.