Dredger "Kamal XXVI" & the Barge "Kamal XXIV" (The Owners And/or Demise Charterers of) v "Ariela" (Owners of the Ship) & Ors

On an application under section 51 of the Senior Courts Act 1981, the court may order disclosure where it is relevant to a live issue, unprotected by privilege, and necessary for a fair and economical determination. The recognised Chapman features are non-exclusive. Although the reasons why underlying litigation failed will ordinarily be irrelevant, an unlitigated issue as to whether a funder could and should have discovered fraud at an early stage may bear on whether a non-party costs order is just and equitable. Legal professional privilege does not protect communications made to advance a fraud where an innocent client or solicitor has been used as the fraudster’s mechanism. That fraud exception applies to both legal advice and litigation privilege.

The owners of the ship Ariela sought disclosure from underwriters who had funded and supported proceedings brought by the owners or demise charterers of the dredger Kamal XXVI and barge Kamal XXIV. The application arose in contemplated proceedings under section 51 of the Senior Courts Act 1981 for the underwriters to pay unrecovered costs of the earlier litigation.

The earlier claim had been found fraudulent. The issues were whether disclosure was appropriate to determine the non-party costs application, whether the underwriters’ investigation and possible early discovery of the fraud were relevant to the just and equitable discretion, and whether privilege protected documents connected with pursuing the fraudulent claim.

1. The application for disclosure was granted. Disclosure was appropriate where it related to live issues in the section 51 application, was not protected by privilege, and was necessary to ensure a fair and economical hearing. The substantial sum at stake and the need properly to determine the contested issues made the order proportionate and just.

2. The discretion under section 51 is exercised only where it is just and equitable to make a costs order. The five features identified in Chapman Ltd v Christopher—that the insurers determined the claim would be fought, funded the defence, had conduct of the litigation, fought predominantly for their own interests, and failed entirely—are non-exclusive. The fifth feature required a minimal adjustment because the underlying claim had produced a small recovery.

3. The usual rule that the reasons for failure of the underlying litigation should not be investigated did not prevent consideration of whether the underwriters could and should have discovered the fraud before or during the pursuit of the claim. That issue had not been litigated in the earlier proceedings, was expressly raised in the pleadings, and was relevant to the just and equitable discretion. The underwriters’ contention that they too had been victims of the fraud was a countervailing issue rather than a reason to refuse disclosure.

4. The fraud exception to privilege applies where an innocent client and innocent solicitors are used by a third party as the mechanism for advancing a fraud. Following the common-law analysis of Lords Goff and Griffiths in R v Central Criminal Court ex p Francis and Francis, communications made in furtherance of that criminal or fraudulent purpose attract neither legal advice privilege nor litigation privilege. The Court of Appeal decision in Banque Keyser Ullmann SA v Skandia (UK) Insurance Co Ltd was distinguishable on its facts and could not prevent that conclusion.

5. The parties were directed to draw up the consequential disclosure order.