England and Wales High Court (Technology and Construction Court) Decisions

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
TECHNOLOGY AND CONSTRUCTION COURT

		Royal Courts of Justice Strand, London, WC2A 2LL
		23 April 2010

Mr Justice Akenhead

Introduction

1. The Defendants, Mr and Mrs Riklin, apply for security for costs in circumstances in which the Claimant company, Michael Phillips Architects Ltd, have obtained After the Event Insurance ("ATE Insurance") which covers costs payable to the Defendant. This raises issues as to whether or not the conditions required by CPR Part 25.13 for the court to exercise its jurisdiction with regard to security for costs are satisfied and, if they are, at whether or not the Court should exercise its discretion to award such security.

The Background

2. Mr and Mrs Riklin leased a property, St Mary's Lodge, Captains Road, Lymington which they wish to use primarily as a holiday home but which they considered was in need of substantial renovation, modification and refurbishment. To that end in mid-2007, they retained the Claimant to provide architectural and possibly other services in connection with this project. There is an issue between the parties as to the extent of the retainer and the financial basis upon which the Claimant was to proceed.
3. From the pleadings, it seems clear that the project ran into difficulties in mid-2008 when the contractor engaged by the Defendants went into administration. There is an issue as to the extent to which the Claimant was or was required to be involved thereafter.
4. Proceedings were issued by the Claimant on 22 December 2009 in which it claims (by amendment) £147,387.04. That claim is made upon a time spent basis said to have been agreed between the parties. In its Defence and Counterclaim, Mr and Mrs Riklin deny that there was any such agreement and assert that there was a simple contract by which they would pay the Claimant a reasonable fee for work done; they do not assert what a reasonable fee was in all the circumstances but suggest at least that regard should be had to the RIBA fee scales. Set-off is pleaded as a defence in relation to matters raised by the Counterclaim. The Counterclaim puts forward a number of breaches of duty, totalling some 16 in number and the damages claimed exceed £162,000.

The Course of these Proceedings

5. On 8 February 2010, approximately, the Claimant served a "Notice of funding of case or claim" which referred to the existence of a conditional fee agreement dated 16 July 2009. On 18 February 2010, the Defendants' solicitors wrote to the Claimant's solicitors calling for security costs in the sum of £50,000.
6. The proceedings, having initially been issued in the Southampton County Court, were transferred to the TCC in London by order of this Court made on 1 March 2010. Mr Justice Edwards-Stuart made a number of directions leading to a provisional date for the Trial starting on 19 July 2010. The directions included a requirement that the Reply and Defence to Counterclaim be served by 22 March 2010. There was some discussion before the judge about security for costs and the Claimant's solicitor told the court that the Claimant was putting in place ATE Insurance. No order was made or sought at that stage in relation to security.
7. By 8 March 2010, the Claimant's solicitor was saying that an offer in principle for ATE Insurance had been received but that it was unlikely that a formal offer would be received before 31 March 2010. On 19 March 2010, the Claimant's solicitor indicated that he was prepared to agree to a stay of proceedings if the ATE Insurance cover had not been effected by 31 March 2010 and to an extension of the Directions timetable until the policy was in force. On the same day the Defendants' solicitors wrote back indicating that they were not prepared to incur any further costs in this matter until the Claimant had provided security for costs; they did agree to an extension of time for the service of the Reply and Defence to Counterclaim until 26 March 2010.
8. On 30 March 2010, the Claimant's solicitor asked for a further extension of time for the service of the pleading until 6 April 2010. He made it clear that the ATE Insurance cover was not in place but he hoped that it would be finalised within a few days. On the same day the Defendants' Solicitors wrote back agreeing to an extension for the service of the Reply and Defence to Counterclaim until 6 April 2010 on the basis that a stay of proceedings was agreed to be effective immediately to continue until such time as the Claimant had provided evidence that appropriate insurance cover was in place for "at least £100,000 specifically ring-fenced for our clients' costs"; all dates were to be fully extended pro rata to reflect the amount of time lost by the extension of time.
9. On 1 April 2010, the Claimant applied to the Court for an extension of time for the service of its pleading. On the same date, the Defendant applied to the Court for a stay of proceedings until the Claimant had provided security for costs and an extension of the earlier Court Directions to reflect the amount of time lost. On 7 April 2010, the Claimant's solicitor wrote to the Court indicating that the Claimant had no difficulty with the proceedings being stayed "until such time as the Claimant has provided evidence that appropriate insurance cover is in place of at least £100,000 on security for the Defendants' costs."
10. By 7 April 2010, the TCC Registry was indicating that there would be a hearing of the applications (issued on 1 April 2010) on 13 April 2010. Also on that day, the Claimant served its Reply and Defence to Counterclaim. By 8 April 2010, the hearing date had been re-fixed for 15 April 2010. On 12 April 2010, the Defendants served an application directly for security for costs and for a stay of all further proceedings until such security was given. That was accompanied by a document headed "Defendants' Request the Security Costs" which was treated as a statement. The total costs for which a security was claimed was £100,000 including the costs associated with the Counterclaim; duly corrected, the claim for security for costs was in the sum of £66,000.
11. Late on 14 April 2010, the Claimant served responsive witness statements from Mr Phillips and Mr Sutton his solicitor. Mr Phillips exhibited most if not all of the insurance documents for the ATE Insurance which had been obtained on 13 April 2010. I will return to this document and its adequacy for security for costs purposes later.

The Law and Practice

12. The jurisdiction to order security is materially to be found in CPR Part 25.13 (1) and (2) (c):

"(1) The court may make an order for security of the costs if-

(a) it is satisfied, having regard to all the circumstances of the case, that is just to make such an order; and

(b) (i) one or more of the conditions in paragraph (2) applies…

(2) The conditions are-

(c) the claimant is a company… and there is reason to believe that it will be unable to pay the defendant's costs if ordered to do so…"

Thus, the threshold to the Court having jurisdiction where the claimant is a company is that there is reason to believe that it will be unable to pay the defendant's costs if ordered to do so. Once the threshold is established, the Court has a broad discretion as to whether to order security for costs and if so in what amount.

13. Although the case of Keary Developments Ltd v Tarmac Construction Ltd [1995] 3 All ER 534 occurred before the Civil Procedure Rules, the judgement of Peter Gibson LJ provides useful guidance as to the criteria to which a court can and should have regard when deciding as a matter of discretion whether to order security for costs in the case of a company:

"The relevant principles are, in my judgement, the following.

1. As was established by this Court in Sir Lindsay Parkinson and Co Ltd v Triplan Ltd … [1973] QB 609, the court has a complete discretion whether to order security, and accordingly it will act in the light of all the relevant circumstances.

2. The possibility or probability that the plaintiff company will be deterred from pursuing its claim by an order for security is not without more a sufficient reason for not ordering security…By making the exercise of discretion under s 726 (1) [ of the Companies Act] conditional on it being shown that the company is one likely to be unable to pay costs awarded against it, Parliament must have envisaged that the order might be made in respect of a plaintiff company that would find difficulty in providing security…

3. The court must carry out a balancing exercise. On the one hand it must weigh the injustice to the plaintiff if prevented from pursuing a proper claim by an order for security. Against that, it must weigh the injustice to the defendant if no security is ordered and at a trial the plaintiff's claim fails and the defendant finds himself unable to recover from the plaintiff the costs which had been incurred by him in his defence of the claim. The court will properly be concerned not to allow the power to order security to be used as an instrument of oppression, such as by stifling a genuine claim by an indigent company against a more prosperous company, particularly when the failure to meet that claim might in itself have been a material cause of the plaintiff's impecuniosity…but it will also be concerned not to be so reluctant to order security as it becomes a weapon whereby the impecunious company can use it inability to pay costs as a means of putting unfair pressure on the more prosperous company…

4. In considering all the circumstances, the court will have regard to the plaintiff company's prospects of success. But it should not go into the merits in detail unless it can clearly be demonstrated that there is a high degree of probability of success or failure…

5. The court in considering the amount of security that might be ordered will bear in mind that he can order any amount up to the full amount claimed by way of security, provided that it is more than simply a nominal amount; it is not bound to make an order of a substantial amount…

6. Before the court refuses to order security on the ground that it would unfairly stifle a valid claim, the court must be satisfied that, in all the circumstances, it is probable that the claim would be stifled. There maybe cases where this can be properly be inferred without direct evidence…

However, the court should consider not only whether the plaintiff company can provide security out of its own resources to continue the litigation, but also whether it can raise the amount needed from its directors, shareholders or other backers or interested persons. As this is likely to be peculiarly within the knowledge of the plaintiff company, it is for the plaintiff to satisfy the court that it will be prevented by an order of the security from continuing the litigation…

7. The lateness of the application Security is a circumstance which can properly be taken into account…"

14. HHJ Peter Coulson QC (as he then was) summarised various principles relating to the potential stifling of a genuine claim in William Newman v Wenden Properties Ltd [2007] EWHC 336 (TCC):

"It is often argued that the application for security for costs, if allowed, would stifle a genuine claim. In consequence, the courts have refined this element of the discretion under CPR Part 25. It seems to me that the following principles are relevant to the present application:

"9 (a) Where an order for security for costs against the claimant company might result in oppression, in that the claimant company would be forced to abandon a claim which has a reasonable prospect of success, the court is entitled to refuse to make that order, notwithstanding that the claimant company, if unsuccessful, would be unable to pay the Defendant's costs (see Aquilla Design (GRB) Products Ltd. -v- Cornhill Insurance plc [1988] BCLC, 134, Court of Appeal);

(b) Before the court refuses to order security on the ground that it would unfairly stifle a valid claim, the court must be satisfied that in all the circumstances it is probable that the claim would be stifled (see Keary Developments Ltd. -v- Tarmac Construction Ltd. [1995] 2 All E.R., 535, Court of Appeal);

(c) In all but the most unusual cases, the burden lies on the claimant company to show that, apart from the question of whether the company's own means are sufficient to meet an order for the security, there will be no prospect of funds being available and forthcoming from any outside source (see Kufaan Publishing Ltd. -v- Al-Warrack Bookshop Ltd., March 1^st, 2000, Court of Appeal (unreported))."

15. Since the use and popularity of ATE insurance has emerged, usually associated with conditional fee agreements, there has been some authority on whether and in what circumstances ATE insurance can be considered as providing security for costs. Nasser v United Bank of Kuwait [2001] EWCA 556 was a security for costs case involving a claimant resident outside England. Mance LJ made these obiter remarks at Paragraph 60:

"I would interpose at this point that, even where a claimant or appellant is resident abroad, there may of course be special factors indicating that any order for costs will be satisfied in some other fashion. The interesting possibility was raised before us that a claimant or appellant who has insured against liability for the defendants' costs in the event of the action or appeal failing might be able to rely on the existence of such insurance as sufficient security in itself. I comment on this possibility only to the extent of saying that I would think that defendants would, at the least, be entitled to some assurance as to the scope of the cover, that it was not liable to be avoided for misrepresentation or non-disclosure (it may be that such policies have anti-avoidance provisions) and that its proceeds could not be diverted elsewhere. The new arrangements for the funding of litigation certainly appear capable of throwing up possible imbalance, in so far as they permit contingency fee arrangements with uplifts potentially recoverable from losing defendants, but enable claimants to pursue litigation without insuring or securing the defendants' fees. The claimant's contingency fee arrangement in the present case is, however, without uplift."

16. In Al-Koronky and another v Time-Life Entertainment Group Ltd [2006] EWCA Civ 1123, the claimants had a conditional fee agreement with their lawyers but by the time of the first instance hearing had no ATE insurance; by the time of their appeal, they had such insurance. In the judgement of the Court of Appeal, Sedley LJ said:

"33. At more than one point of the judgment below, and at more than one point of the argument before us, the inflationary effect on costs of the claimants' CFA with their solicitors has been canvassed. In a paragraph cross-headed "The relevance of the conditional fee agreement" Eady J said this:

"It has already been recognised that when considering "unfair pressure" it is relevant for the court to take into account the fact that a claimant is pursuing his or her case with the benefit of a conditional fee agreement with a substantial uplift – especially if there is no "after the event" insurance ("ATE"): see e.g. the observations of Mance LJ in Nasser at [60]. Here it has, after a considerable lapse of time, finally been acknowledged on the Claimants' behalf by their solicitor that there is no ATE insurance that is likely to be of any value whatsoever to the Defendants should they succeed. What is more, as I understand it, there is no challenge to the Defendants' assumption that in this particular case there is likely to be a 100% uplift."

34. What Mance LJ said in Nasser was this:

[set out above]

35. Thus a claimant's (or for that matter a defendant's) entry into a CFA with his solicitor has by itself no impact on the case for or against the making of an order for security for costs. This proposition now marches with the decision of the House of Lords in Campbell v MGN Ltd (No.2) [2005] UKHL 61 that the enabling provisions of the Courts and Legal Services Act 1990, s.58, as amended, are compatible with article 10 of the Convention, their differential impact being a matter for Parliament. What may matter, however, is what insurance the claimant has obtained against the eventuality of having to pay the defendant's costs. A claimant who has satisfactory after-the-event insurance may be able to resist an order to put up security for the defendant's costs on the ground that his insurance cover gives the defendant sufficient protection.

36. In the present case, however, we are told that the claimants have after-the-event insurance, but that the policy is voidable or the cover ineffective if their eventual liability for costs is consequent upon their not having told the truth. We have not been told what the premium was, but since the outcome of this case will depend entirely upon which side is telling the truth, one wonders what use the insurance cover is. If the claimants win, they will have no call on their insurers. If they lose, it is overwhelmingly likely that it will be on grounds which render their insurance cover ineffective."

17. In Belco Trading Co v Kondo [2008] EWCA Civ 205, the Court of Appeal had to consider an order made by the first instance judge for security for costs which effectively required the payment into court of monetary sums or the provision of an insurance policy which gave the defendants equal or better security than payment of monies into court. There is no analysis in the lead judgement of Lord Justice Longmore of previous authorities. However, the judgement does provide some useful insights into the approach to be adopted on a security for costs applications when there is an ATE insurance in place:

"3. The claimants now seek permission to appeal the order for security for costs… the main ground on which permission to appeal is sought by the claimants relates to what is said to be the judge's apparent acceptance that, in theory, an …ATE insurance policy… could be used as an alternative to payment in the court, or acceptable bank guarantee, as a means of providing security for the defendants' costs. The order does, however, provide that the insurance policy should give the defendants "equal or better security" than that afforded by a payment into court or a bank guarantee.

4. The claimants, through their Counsel Mr Douthwaite, submit that this requirement can never be met, since payment into court or a bank guarantee given to the defendants is a complete security, while it is inevitable that an insurance policy is less secure, partly because it is not a promise to the defendants but to the claimants; and partly because the policy gives to the insurers many opportunities to cancel the policy for breach of its terms, quite apart from any insurer's inherent right to avoid the misrepresentation or non-disclosure. The difficulty with Mr Douthwaite's submission is that it was the claimants themselves who proposed the policy as an effective means of providing security for costs before they had even obtained the policy. Thus, the judge did not know anything about the terms it would contain and may well have assumed, for all one knows, there might be an anti-avoidance provision. It was for this reason that he, as it seems to me, accepted the defendants' argument, post his judgement, and incorporated the requirement in his order that the policy should afford equal or better security than the traditional methods of giving security for costs.

5. It would, in my judgement, be most unjust to the defendants to prevent them from pointing out that the policy in fact gives them much less security than the traditional form of security for costs. If the judge had been informed of, or had foreseen, the problems that have arisen out of the terms of the ATE policy now that it has been acquired, he would almost certainly, in my view, not have given the claimants the option of providing security by reference to the ATE insurance in the first place.

6. In fact, it is in any event doubtful if the judge did accept in principle the suitability of an ATE policy. He said in paragraph 10 of his judgement:

" Whilst in principle I find that they should be in the order of the security of costs, the alternative to that is the claimant providing evidence that it has acquired the relevant insurance cover which would satisfy the defendants that that would be equal to, or even better than, payment of monies into court in respect of security."

7. That, to my mind, is saying that the defendants are entitled to be satisfied that any ATE policy propose is not in fact equal to, or better than, payment into court, and to reject it if not unreasonably so satisfied.

8. However all that may be, it would, in my judgement, be quite inappropriate for this court now to give permission to appeal to allow the claimants to argue that the equal or better security provision should be deleted, when it was for their benefit that the judge made reference to the ATE insurance in his order. It would be especially inappropriate in a case where the claimants had not even procured the policy on which they were proposing to rely when they made submissions as to its adequacy to the judge.

9. In fact, for the reasons which I have endeavoured to give, it is most unlikely that any standard form of ATE insurance could provide a suitable alternative to the standard forms of order the security of the costs. The claimants, not surprisingly, cannot comply with the third option contained in the order and must, in my judgement, now, therefore, comply with option A or B."

18. These three cases are not absolutely determinative as to whether ATE insurance can provide adequate or effective security for the defending party's costs. That is not surprising because it will depend upon whether the insurance in question actually does provide some secure and effective means of protecting the defendant in circumstances where security for costs should be provided by the claimant. What one can take from these cases, and as a matter of commercial common sense, is as follows:

(a) There is no reason in principle why an ATE insurance policy which covers the claimant's liability to pay the defendant's costs, subject to its terms, could not provide some or some element of security for the defendant's costs. It can provide sufficient protection.

(b) It will be a rare case where the ATE insurance policy can provide as good security as a payment into court or a bank bond or guarantee. That will be, amongst other reasons, because insurance policies are voidable by the insurers and subject to cancellation for many reasons, none of which are within the control or responsibility of the defendant, and because the promise to pay under the policy will be to the claimant.

(c) It is necessary where reliance is placed by a claimant on an ATE insurance policy to resist or limit a security for costs application for it to be demonstrated that it actually does provide some security. Put another way, there must not be terms pursuant to which or circumstances in which the insurers can readily but legitimately and contractually avoid liability to pay out for the defendant's costs.

(d) There is no reason in principle why the amount fixed by a security for costs order could not be somewhat reduced to take into account any realistic probability that the ATE insurance would cover the costs of the defendant.

The ATE Insurance in this case

19. It is clear from the evidence submitted to the Court that the ATE Insurance was obtained primarily upon the basis of a witness statement prepared by Mr Phillips and Counsel's opinion on the merits. For understandable reasons, those have not been put before the Court but it is entirely reasonable to assume that they were put forward to the insurers to persuade them to provide cover and to enable them to determine the level of risk upon which the premium would be calculated.
20. Apart from the acceptance documents, the Court has been provided with the Policy Schedule, a Policy Summary and what is said to be the Policy. The insurers are a company called ARAG plc which is part of an American group which has recently commenced legal costs insurance in this country. It is authorised and regulated by the Financial Services Authority. The premium is £27,000 and the limit of indemnity is £100,000. Cover was backdated to the date of the CFA to 16 July 2009 when the CFA is said to have been entered into between the Claimant and its solicitor. The Policy Schedule contains this endorsement:

"We would not cover any costs awarded to the defendants as a result of the counter-claim being successful."

Whilst it is not appropriate for this Court to make any final conclusions about this endorsement, it is at the very least ambiguous. The Policy elsewhere says that the insurer will pay the Defendants' legal costs. However, there is a realistic scenario whereby the Claimant may succeed in establishing an entitlement on its claim to fees in the sum of £X but its claim is defeated by way of set off in respect of a greater sum awarded to the Defendants on their counterclaim. Thus, it could be said with some force that a costs order in favour of the Defendants in relation to their costs of defending the Claimant's claim was "awarded as a result of the counter-claim being successful", therefore activating this endorsement and entitling the insurers not to pay out in respect of such defendants' costs.

21. In the Policy Summary, one of the "Significant Features & Benefits" is said to be that the insurer will pay:

"your own disbursements other than barristers fees and opponents legal costs and disbursements if:

(a) you lose or your claim is discontinued…"

Without knowing the terms of the CFA entered into by the claimant, it is at least possible that the £100,000 indemnity covers solicitors' fees and expert costs. Depending on the amount, the indemnity cover available for the "opponent's legal costs and disbursements" may be eroded.

22. The Summary also under "Significant Exclusions or Limitations" contains this statement from the Insurers:

"If we believe that there are not reasonable prospects of recovering damages (or other remedy) from the opponent then cover will end."

It is therefore (highly) arguable that the Insurers, for instance when it has seen the witness statements and expert report of the Defendants, will in all honesty no longer believe that there are reasonable prospects of success and will be able to terminate the cover and thus remove any protection in which the Defendants might have.

23. The Policy terms were prefaced with these words:

"Your policy only covers you during the period of insurance and provided that…

4. We believe that it is more likely than not that your claim will be successful."

That underlines the point made in the preceding paragraph.

24. Under the heading "What is Insured", Clause 1 says that the Insurers will pay the insured's "opponent's legal costs if a) a court orders [it] to pay them following a judgement made against" the insured. It can thus be said that a liability to pay under the Policy does not arise unless and until a court orders the Claimants to pay costs. This is material in determining whether or not any sum might be payable by the Insurers up to the date of cancellation by of the insurance policy.
25. The Conditions are prefaced with these words:

"Failure to keep to any of these conditions may lead the insurer to cancel your policy, refused to pay or withdraw from an ongoing claim."

This would appear to provide the insurer with a relatively easy route in effect to avoid the policy and any payment obligations which it would otherwise have where there is anything more than an insignificant breach of the conditions. Examples of the responsibilities of the insured are listed in Clause 1 of the conditions:

"You must

(a) observe and keep to the terms of this policy.

(b) not do anything that hinders us or the solicitor.

(c) tell us immediately if anything that may materially alter our assessment of the claim…

(e) provide us with everything we need to help us handle any claim…

(i) minimise anything that the insurer has to pay and try to prevent anything happening that may cause a claim under this policy…"

Thus, it is readily foreseeable that the Insurer could in the context of live litigation readily be in a position, if it so wished, to avoid paying.

26. Clause 8 deals with "Fraudulent Claims":

"If you make any claim which is a fraudulent or false, the policy shall become void and all benefit under it will be forfeited."

Although there is no issue of fraud raised on the pleadings in this case, the Claimant's claim is based on the time said to have been spent. The money claim, for just under £150,000, is based on time recorded by a number of different members of the Claimant's staff. At first blush, it might be thought that a claim for £150,000's worth of architectural time for a project, which was estimated to cost some £383,000 (and thus about 40% of that cost), in circumstances where it seems to be the case that after three or four months' work, the contractor having gone into administration and the Claimant is said to have done little further work, seems very high. Obviously, and I can make no findings about this, it is at least within the realms of possibility that there could be findings of fact that the time claim was more than insignificantly exaggerated. In those circumstances it could well be open to the insurer to avoid the policy under Clause 8. This also raises the insurers' right to avoid the policy if there was a material misrepresentation or non-disclosure in the period leading up to the provision of cover.

27. Clause 9 deals with "Cancellation". It gives the Insurer extensive rights to cancel the policy, for example:

"(c) The insurer may cancel the policy immediately…and reclaim any payments made under the policy, if

(i) you fail to meet any of your responsibilities under this policy; or…

(iv) you make any claim which is fraudulent or false

(d) The insurer may cancel the policy immediately, if

(i) your conditional fee agreement terminates for whatever reason, or…

(iii) we believe your claim is unlikely to be successful

(e) The insurer may cancel the policy at any time by giving at least 21 days' notice to you…"

Any failure by the Claimants to fulfil its "responsibilities" could lead to cancellation. If the CFA, which has not been disclosed, terminates, the policy can be cancelled. If the insurer, in good faith, gets to the stage at which it believes that the Claimant's claim is unlikely to be successful, for instance after the disclosure of documents or after the exchange of witness statements or expert reports, the insurer appears to have an unfettered right to cancel and avoid paying under the policy. Finally it has a right to cancel the policy for no reason (bad or good); that seems to be to be an extraordinary insurance provision. Whilst it might be said it is subject at the very least to a need on the part of the insurer to act in good faith, it is potentially a draconian right. There is nothing in the Policy which spells out what the financial consequences of a cancellation are. It is at least highly arguable that the insurer, following a valid cancellation, has no obligation to indemnify the insured unless the obligation had already accrued, for instance if there was already a court order requiring the Claimant to pay the Defendants' costs. It is at least foreseeable that, if the cancellation occurred before the commencement of the trial, the insurer would have no obligation with regard to costs orders made thereafter. This would negate any potential benefit or security with regard to the Defendants' costs.

28. I have formed a very clear view that this ATE Insurance provides no real security for the Defendants' costs let alone any real comfort for the Defendants.
29. I indicated to the parties at the first hearing in effect that, if sensible proposals could be made in relation to the insurer whereby the avoidance mechanisms under the existing policy would not be operated at least with regard to the Defendants, I would be prepared to consider them. To that end, the Claimant submitted a witness statement from Mr Haynes, the Underwriting Manager of the insurer. In essence, all that he offers is a further endorsement to the policy to the effect that the insurer "will not refuse to pay on a claim which is found to be fraudulent or false". So far as all the other cancellation provisions are concerned, no such offer is made. Essentially he does not address the impact of the clauses to which I have referred above other, broadly, than saying either that they are necessary or that it is not likely that they will be mobilised by the insurer. Understandably, he is not prepared to give any undertaking to pay the costs orders regardless of any conditions of the policy. In my judgement this goes nowhere near providing any real comfort or security to the Defendants. Even if there can be no cancellation simply on the grounds of fraudulent or false claims, it is still open to the insurer to cancel the policy if in good faith it forms the view at any time that the Claimant's claim is unlikely to be successful, which of course is a view it could form if it emerged that any of the time claims were demonstrably and deliberately overstated.

The Claimant's Financial Position

30. It is accepted, that, subject to any issues raised by the ATE Insurance, there is reason to believe that the Claimant will be unable to pay the Defendants' costs if ordered to do so, for the purposes of CPR Part 25.13 (1) and (2). It is argued that, in the light of the ATE insurance and given that the burden of establishing that the Claimant will be unable to pay the Defendants' costs is on the Defendants, the Defendants have not established the threshold necessary to give the court jurisdiction and discretion to order security for costs. That argument must fail in my view at least in the circumstances of the ATE Insurance in this case. I do not see how it can be said that an insurance policy which does not provide direct benefits to the Defendants and under which they are not amongst the insured parties and which does provide for cancellation of the policy either for a large number of reasons or for no reason provides any appreciable benefit or raises any presumption or inference that the Claimant will be able to pay the Defendants' costs if ordered to do so.
31. It follows from the above that I am satisfied that the Defendants have established the necessary threshold to give the Court jurisdiction to order security costs.

The Amount of Security

32. The Defendants had indicated in writing that their anticipated costs through to trial are £100,000 including costs associated with their Counterclaim. They estimate that the cost of defending the Claimant's claim as opposed purely to pursuing the counterclaim (for which they do not claim security) will be £66,000. No breakdown of any sort is provided of either figure. That said, the £100,000 figure for a six-day trial, with Counsel, solicitors and experts involved, does not seem obviously too high. However, whilst issues raised on the counterclaim may overlap historically with the claim to a not insignificant extent, I can not see that more than half of the costs could be attributed or attributable to defending the claim brought by the Claimant.
33. Subject to any argument about the Claimant's case being "stifled" by an order for security, I consider that an appropriate amount of the security for costs would be £30,000. That reflects the facts that there would be an assessment of the costs which would inevitably reduce the gross costs bill which the Defendants, if they succeeded effectively in defending the claim, would be able to recover and that the £50,000 figure for the gross costs is a maximum.

The Merits of the Claim

34. It is argued with some force by the Claimant that, as it has been paid nothing for its architectural services, it will succeed at least to the tune of some £40,000-£70,000. That is based in effect on the Defendants' assertion that the Claimant's entitlement should be assessed by reference to the percentage fee of 12% or 14% on the total construction cost, which, it is argued, one should relate to the original building contract sum of some £383,000 or the eventual cost of over £550,000. It is argued that if it is on a time basis the sum due will approach the figure claimed of some £147,000.
35. I accept, as do the Defendants by their Counsel, that there is a likelihood at the very least that some credit will be found to be due to the Claimant with regard to the architectural services provided by it. The Court can not go into the merits or the evidence to determine whether a time or percentage basis or indeed a combination of the two will be what is found ultimately at trial. Similarly, however, the Court can not and should not determine in this case what the final outcome is likely to be on the Counterclaim. It is thus not possible or indeed desirable for the Court to determine whether and if so to what extent the Counterclaim will be established so as to enable the Defendants to set up an effective set off against any liability which they have for fees to the Claimant. It follows that the Court can not determine whether the Claimant will succeed in its claim for fees and that the Court should not take this into account in refusing security for costs.

Stifling of the Claimant and its Claim

36. Given the paucity of the evidence provided by the Claimant and Mr Phillips about its and his current state of affairs and the fact that the Claimant has had limited time to put together information on this topic, I allowed the Claimant time to submit further evidence.
37. The Claimant did submit further evidence on this topic but on the occasion of the second hearing agreed that it could provide security for costs of £30,000. It was therefore unnecessary to consider whether or not there was any question of stifling or the Claimant being prevented by a security for costs order from pursuing its claim.
38. It was argued by the Claimant, although there was no evidence directly on the issue, that the Claimant's current impecuniosity was caused by the Defendants' non-payment of its fees. That argument can not be sustained in my judgement for the following reasons:

(a) The Claimant's impecuniosity is established by their latest abbreviated unaudited accounts for the year ending the 31 March 2009. However, on the Claimant's own case, as set out in its Reply and Defence to Counterclaim, it did not invoice for these fees until 26 May 2009. Whilst it is conceivable that its entitlement to payment arose earlier, it might be considered the author of its own misfortune by not invoicing until the time that it did.

(b) Without some evidence explaining what is within the figures for "Debtors" and " Current liabilities Amounts due within one year", the Court simply could not determine whether the non-payment of fees by the Defendants materially contributed to their being only £1386 as the "total assets less current liabilities" for the year ending 31 March 2009.

(c) Set off is a valid defence in English Law. If the Counterclaim is valid, it is capable of giving rise to an effective set off which the Defendants would have been entitled to raise. In those circumstances, the Claimant would not have been entitled to payment at least to the extent of the set off. The Court can not determine on this application the validity of the Counterclaim and therefore can not determine in fact whether the impecuniosity of the Claimant was caused by the Defendants.

The Effect of the Counterclaim

39. It is argued by the Claimant that security should simply be refused because the claim and counterclaim both raise the same issues, because both claim and counterclaim, it is said, are going to be litigated anyway and ordering security which was paid may serve no purpose other than to hamper the Claimant's conduct of the case. This is supported in principle by a note in the CPR (2010 page 690). That argument, however, is not readily open to the Claimant because it accepts by apportioning costs between the defence of the claim and the counterclaim that there are issues which pertain peculiarly to the claim and to the Counterclaim. Indeed it is clear from a perusal of the pleadings in the case that the claim for fees raises issues which do not arise on the Counterclaim. For instance, there is an issue as to what is or was the legally or factually agreed basis for fees; that does not impact on the Counterclaim as such, which is primarily concerned with whether or not there was a breach of professional duties. The extensive factual investigation into whether or not the time claim is factually justified does not directly affect the Counterclaim.

The Exercise of the Discretion

40. On the occasion of the second hearing and the court having given notice of its draft judgement on all issues that were not the subject matter of the adjournment, the Claimant accepted that it could and should provide the security for costs of £30,000. I had made it clear that, subject to the question of stifling and to whether the insurer could come up with anything more by way of the ATE Insurance, the discretion would have been exercised in favour of security for costs being ordered against the Claimant. Accordingly, such security will be provided.