Saved by the Cap: Third Party Costs Order

On 30 June 2014 judgment was handed down by Mrs Justice Rose in Swynson Limited v Lowick Rose LLP (in liquidation)[2014] EWHC 2085 (Ch).

Rose J held that the Defendant, a firm of accountants, were liable but found that they owed no duty of care to the individual investor who had provided finance for a management buy-out. She awarded damages up to the liability cap of £15million inclusive of interest and costs, on the basis that the liability cap set out in the engagement letter reflected the commercial agreement reached by the parties.

The Claimants' 'loss' exceeded the £15m cap and they therefore applied for a Non-Party Costs Order (under s.51 of the Senior Courts Act 1981) against the Defendant's Insurers. As the Defendant was in liquidation the Claimants argued that it was in fact Insurers who were running the defence and that they should be liable for the costs incurred. In making such an application, several thresholds had to be considered by the Court. The first was whether the Court had jurisdiction to award costs against a non-party and whether the five requirements identified in TGA Chapman v Christopher [1998] 1 WLR 12 (CA)("Chapman") were satisfied. The second, if the Court found that there was jurisdiction and that s.51 was engaged, was whether it was just and fair in the circumstances to make such an order. This goes to the heart of the Court's discretion.

Rose J found that the Court's jurisdiction was engaged and the five factors identified in Chapman were established – i.e. (1) Insurers determined that the claim would be fought; (2) Insurers funded the defence of the claim; (3) Insurers had conduct of the litigation; (4) Insurers fought the claim exclusively to defend their own interests; and (5) the defence failed in its entirety. The case passed the threshold of being "exceptional", so a non-party costs order could be awarded in such circumstances. Although it was not alleged in this case, Rose J affirmed that it was not necessary to show that the defence was run in a cynical or improper manner.

However, in exercising the Court's discretion, Rose J held it would be wholly unjust for her to make such an order. In arriving at this conclusion, Rose J distinguished this case from previous authorities, in that there was no unsatisfied order for costs and the judgment sum had (in effect) been paid. In addition, Rose J stressed that the contractual agreement reached by the parties was that liability would be capped at £15million inclusive of costs and interest and that were she to make an order for costs under s.51 it would circumvent her judgment of 30 June 2014. Of significance was the fact that the Claimants were fully aware of the level of the cap, given that they were the primary orchestrators of its negotiation. Rose J held that it would be wholly unjust for the Claimants to recover costs from a third party by way of a s.51 order as in effect this would go behind the commercial bargain reached by the parties. The Claimants' application was dismissed.

The decision is an important one and raises a number of previously unconsidered issues in relation to professional indemnity insurance for impecunious Insureds. Surprisingly the Court held that the jurisdiction was engaged and that the case fell within the scope of Chapman. The notion that an Insurer, standing behind an insolvent Insured, is potentially exposed to a s.51 costs order by simply running a defence (as opposed to settling the claim regardless of merits) is counter-intuitive. It is also questionable why such circumstances pass the "exceptional" threshold.

This decision serves as a warning to Insurers dealing with Insureds in liquidation and a reminder of the importance of engaging liquidators in the litigation process. There is now a clear imperative to try and persuade liquidators to engage at the outset of a case and at appropriate intervals throughout. The decision made by Rose J will invariably encourage strategic s.51 applications. Insurers should be on their guard.

Swynson Limited v Lowick Rose LLP (in liquidation)[2014] EWHC 2085 (Ch)