Saxon Woods Investments Limited v Francesco Costa & Ors

On an application to substitute security for costs, the court must first determine whether there has been a material change of circumstances. If so, it retains a broad discretion and does not conduct a fresh security-for-costs application.

An ATE policy may provide sufficient protection where its terms prevent the insurer from readily and legitimately avoiding liability. The court must construe the policy, assess the circumstances in which avoidance may occur, and evaluate the likelihood of those circumstances arising on the pleaded case. Clear and unequivocal wording may exclude avoidance for fraudulent or reckless non-disclosure without using those expressions expressly. The interests of an innocent costs-protection beneficiary may be distinguished from those of an insured seeking to benefit from its own fraud.

The petitioner sought to vary an earlier order requiring it to provide £1,348,910 as security for the first respondent’s costs. It proposed replacing the cash payment with an ATE policy incorporating an anti-avoidance endorsement.

The application followed shortly after the first respondent served proposed amendments alleging serious dishonesty by a former director associated with the petitioner. The petitioner said that the allegations prevented the insurer from authorising reliance on an endorsement before the earlier hearing, and that refusal of the variation would prevent it pursuing the proceedings. The issues were whether there had been a material change of circumstances, whether the policy and endorsement afforded sufficient protection, and how the court should exercise its discretion.

1. Material change and discretion. The petitioner established a material change of circumstances. The proposed dishonesty allegations and supporting material were served so shortly before the earlier hearing that the insurer could not properly consider them before agreeing to the endorsement. The present application was therefore not merely an attempt to obtain a rehearing. Following Recovery Partners GB Ltd v Rukadze [2018] 1 WLR 1640, the court retained a broad discretion, taking account of the duration and quality of the existing security, the explanation for the change, and hardship or prejudice.
2. Sufficient protection. The relevant question was whether the policy and endorsement provided sufficient protection. The court had to assess the meaning of the policy, how readily it could be avoided legitimately and contractually, and the likelihood of circumstances permitting avoidance. The pleaded case was material to that assessment.
3. Construction. The endorsement made the policy non-voidable and non-cancellable and required claims to be honoured despite policy exclusions and provisions of general law that would otherwise permit avoidance or denial of cover. Those words were clear, unambiguous and unequivocal. They covered fraudulent and reckless non-disclosure, even though the words fraud and dishonesty were not used expressly.
4. Public policy and risk. The first respondent was an innocent third-party beneficiary enforcing the policy, rather than a party seeking to benefit from its own fraud. The allegations concerning the former director did not necessarily defeat the petitioner’s unfair-prejudice claim. The risk of successful avoidance was therefore insufficient to deprive the endorsement of its protective effect.
5. The court accepted the ATE policy and anti-avoidance endorsement as sufficient security and varied the order of 9 December 2022 accordingly.