Saxon Woods Investments Limited v Francesco Costa & Ors

The court allowed the petitioner’s application to vary its earlier security-for-costs order and substituted the previously ordered cash payment with the petitioner’s after-the-event (ATE) insurance policy together with an anti-avoidance endorsement. The judge found there had been a material change of circumstances because serious allegations of dishonesty were served shortly before the security hearing, which prevented the insurer being given adequate time to consider and authorise an anti-avoidance endorsement. Applying authorities including Recovery Partners and Premier Motorauctions, the court asked whether (i) the policy wording (including the endorsement) meant the insurer could readily avoid liability, (ii) whether any valid contractual or legal route to avoidance remained, and (iii) how likely it was that those routes would be invoked. The judge concluded that the endorsement was clear and unambiguous in excluding the insurer’s ordinary remedies to avoid or repudiate the policy (including on grounds which would otherwise arise under the Insurance Act 2015 or general law), and that on the factual matrix the risk of legitimate avoidance for fraudulent or reckless non-disclosure was not real. The variation was granted because the endorsement provided sufficient protection and refusal would cause prejudice to the petitioner.

The petitioner (a minority shareholder) sought variation of the court’s earlier order requiring it to pay a sum into court as security for the first respondent’s costs. The petitioner asked the court to accept its ATE insurance policy together with an insurer’s anti-avoidance endorsement as an alternative to the cash payment. The first respondent opposed, arguing (among other things) that the matter could not be reopened, and that the endorsement did not exclude avoidance for fraud or reckless non-disclosure and therefore did not provide sufficient protection.

The judge framed the issues as:

• whether there had been a material change of circumstances sufficient to permit re-opening the interlocutory decision;
• whether the endorsed ATE policy provided “sufficient protection” so as to be an adequate substitute for the cash security; and
• the proper construction of the endorsement and whether public policy or other legal rules prevented its effect.

The background facts material to those issues were that the first respondent served proposed amended points of defence alleging dishonesty against a former director (Mr Loy) a few days before the security hearing on 9 December 2022. That timing meant the petitioner’s insurer had not had a proper opportunity to consider whether it could provide an anti-avoidance endorsement. The insurer later agreed in principle to the endorsement after seeing the amended pleadings and supporting material.

On legal issues the judge reviewed authorities concerning substitution of security (notably Recovery Partners GB Ltd v Rukadze), and the law on ATE cover as an answer to security-for-costs applications (including Premier Motorauctions and related cases). The judge applied a three-part assessment: (1) the meaning of the policy and endorsement; (2) how readily the insurer might legitimately and contractually avoid liability; and (3) the likelihood of the circumstances arising that would permit avoidance.

Analysing the endorsement and the policy together, the judge concluded the endorsement plainly and unambiguously (and having been negotiated after the insurer had considered the amended pleadings) excluded the insurer’s ordinary rights to avoid or repudiate the policy and expressly extended to exclude any remedy the insurer might otherwise have under the policy or general law. That construction was consistent with the factual matrix and the insurer’s opportunity to evaluate the newly-pleaded allegations before agreeing the endorsement. The judge rejected the submission that public policy or the rule against contracting out of fraud prevented enforcement in the respondent’s favour because the third-party beneficiary (the respondent) was not seeking to benefit from his own fraud and the alleged dishonest conduct related to the agent (the former director) rather than the respondent. The court therefore held the ATE policy with the anti-avoidance endorsement afforded sufficient protection. The judge varied the earlier order to allow the endorsement and policy to stand as security, having regard also to prejudice to the petitioner if a cash sum remained required.

The application to vary the 9 December 2022 security-for-costs order was allowed and the earlier order was varied to permit the petitioner’s ATE insurance policy with the agreed anti-avoidance endorsement to stand as security. The judge found (i) a material change of circumstances existed because serious allegations were served days before the earlier hearing which prevented the insurer from authorising an anti-avoidance endorsement, and (ii) on construction and the factual matrix the endorsement was clear and unambiguous in excluding the insurer’s ordinary rights to avoid or repudiate the policy for fraudulent or reckless non-disclosure, so the endorsed policy provided sufficient protection to the respondent.