Drawing a line – the extent and basis of non-party costs liability

The general cost risks of litigation

All parties to litigation should be concerned with – besides winning the litigation – the other side being good for any damages and / or costs they may be awarded.

Each side should only push forward with litigation once they are clear on this point. They also need to be able to afford the other side’s costs in the event they lose, either from their own resources or have alternative means (such as an insurance policy).

One of the first steps taken with a prospective new client (whether as a potential claimant or defendant in litigation), therefore, is to ensure that:

• they have adequate legal expenses cover, be that legal aid, before or after-the-event legal expenses insurance or sufficient assets to cover their own and the other side’s legal costs; and
• as best as we possibly can, the other side has the means to pay our client’s legal costs.

A recent decision of the Supreme Court

What happens when a defendant becomes insolvent or bankrupt – will their insurers pay your damages and costs?

This was explored by the courts in the case of Travelers Insurance Company Ltd (Appellant) v XYZ (Respondents) [2019] UKSC 48.

In this case, the Supreme Court overturned the decision of the Court of Appeal and, effectively, that of the High court before it, which ordered a medical clinic’s insurers to pay the costs of 426 successful but uninsured claimants.

This despite the fact that the insurer funded the whole of the clinic’s defence, did not disclose until well into the litigation that all but 197 of the claimants were uninsured and the clinic entering insolvent administration half-way through the litigation.

Broadly speaking, in deciding whether a third party should pay costs, the court will consider whether the insurer (third party) took control of the litigation and became “the real defendant” or, if the claims are wholly uninsured (as in the present case), engaged in “unjustified intermeddling”.

For the latter test, it will usually be necessary to show that the third party’s involvement caused the claimants to incur their costs and such cases are likely to be rare especially where, as in the present case, the third party acts in good faith in relation to insured claims.

The lower courts relied on a number of specific instances of the insurer’s conduct, but ultimately the Supreme Court found:

• the insurer’s conduct in the present case did not cross the line into “unjustified intermeddling”;
• as the law stands, parties are not legally obliged to disclose the details – including the limit or extent – of their insurance;
• third-party involvement in decisions of a party to make or not to make offers of settlement or admissions to uninsured claimants was justified; and
• an “asymmetry of risk” that is not the product of the third-party’s intervention was not intermeddling.

In the present case, the medical clinic could have recovered its costs if the uninsured claimants had failed in their claims, but each claimant was independently liable for a small proportion of the overall costs.

Analysis

Solicitors should advise clients on all appropriate means of funding including third-party litigation funding in the right circumstances. This will obviously come at a cost (usually a deduction or fee from the client’s damages) and a cost risk analysis should be carried out to confirm suitability of the funding arrangement.

In an age of efforts by both those concerned with policy (whether judges or policy makers and lobbyists) and third-party funders to increase access to justice, it remains to be seen to what extent third-party funders are pursued as the potential subject of a third-party costs order.

The Supreme Court ruling should reassure third-party funders that do not seek to take control of the litigation and become “the real defendant” or engage in “unjustified intermeddling”. As the third-party funder market grows and becomes more competitive, there will inevitably be outlier funders whose personal business interest in the litigation puts them at risk of being seen by the court as not so much facilitating access to justice for the claimant, but gaining access to justice for its own purposes and thereby distorting the proper function of the justice system.