Harlequin Property (SVG) Ltd & Anor v Wilkins Kennedy (a firm)

An after-the-event insurance policy can provide security for costs, but only where its terms and the surrounding circumstances give the defendant real protection. Objections must be assessed realistically. A theoretical possibility that a reputable insurer may commute the policy is insufficient. A concern is realistic where insolvency in a jurisdiction outside the Third Parties (Rights Against Insurers) Act 1930 may divert policy proceeds to an insolvency practitioner, leaving the defendant unsecured. Exclusion of the Contracts (Rights of Third Parties) Act 1999, combined with the absence of a direct deed or guarantee, may make the insurance inadequate. The court need not automatically require payment into court or a bank guarantee.

The claimants brought a substantial Technology and Construction Court claim concerning alleged breaches of contract and other duties arising from accountancy and auditing services connected with a property development. The claim exceeded US$60 million. The defendant applied for security for costs.

The parties agreed that security should be provided and that the relevant amount was £2.75 million. The dispute concerned whether an after-the-event policy issued by DAS Law Assist gave proper security. The defendant challenged the policy on the grounds of possible commutation and the risk that it would not protect the defendant if the claimants entered insolvency proceedings in SVG. The central issue was whether those concerns were realistic rather than theoretical or fanciful.

1. Outcome. The objection based on possible commutation failed. The objection based on the claimants’ possible insolvency in SVG was realistic and made out. The ATE policy, in its existing form, therefore did not provide proper security.
2. Applicable principles. Under CPR 25.12 and 25.13 the court has a wide discretion as to whether security should be ordered and the form it should take. Security need not be provided by payment into court or a bank guarantee. Depending on its terms and the circumstances, an ATE policy may provide adequate security, although it will rarely be as good as traditional security. The court must assess objections carefully and reject only theoretical or fanciful concerns.
3. The authorities, including Al-Koronky and another v Time-Life Entertainment Group Ltd and another [2006] EWCA Civ. 1123, Belco Trading Co v Kondo and another [2008] EWCA Civ. 205, Michael Phillips Architects Ltd v Cornel Clark Riklin and another [2010] EWHC 834 (TCC) and Verslot Dredging v HDI Gerling Industrie Vesicherungag AG [2013] EWHC 658 (Comm), supported a pragmatic assessment of whether the proposed security was real and effective.
4. The commutation objection was not realistic. DAS was a reputable insurer and had expressly disavowed such conduct. The court found no realistic risk that DAS would arrange with the claimants to deprive the defendant of the policy’s protection.
5. Geophysical Service Centre Co v Dowell Schlumberger (ME) Inc [2013] EWHC 147 (TCC) was distinguishable. It concerned a straightforward claim without the fraud and insolvency features present here. The possible insolvency proceedings in SVG created a different risk. The Third Parties (Rights Against Insurers) Act 1930 did not apply in SVG, so the pre-1930 position could apply and policy proceeds might be paid to an insolvency practitioner. The defendant might then rank only as an unsecured creditor.
6. The risk was reinforced by the policy’s exclusion of the Contracts (Rights of Third Parties) Act 1999 and the absence of a direct deed or guarantee from DAS. The court suggested that the defect might be addressed by a direct indemnity or an endorsement providing for direct payment of ordered costs without set-off. The supplied judgment records no final formal order.