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
		22nd December 2011

 


Mr Justice Akenhead:

1. A Pre-Trial Review was fixed on 6 May 2011 for 9 December 2011, listed for one hour in this case, the trial for which has been fixed for 19 March 2012. There would have been enough normal business to be dealt with on such an occasion. However, on 1 December 2011, the Defendant issued an application effectively for three further orders, security for costs, specific disclosure and Further Information. This was supported by a 17 page witness statement of Joanne Shelston with some 200 pages of exhibit. This application contained a time estimate of two hours and the Court was persuaded, administratively, to stand the Pre-Trial Review hearing over to 12 December 2011. On 9 December 2011, the Claimant served six witness statements in response which with exhibits ran to 186 pages and it served a further witness statement on 12 December 2011. Whilst the Court was able to deal with the Further Information, specific disclosure and revised timetable arrangements on 12 December 2011, following the opening of the security for costs application by Mr Selby (Counsel for the Defendant) Ms Slow (Counsel for the Claimant) on instructions applied for an adjournment of the security application on the basis that her client had not had sufficient time to prepare a full response, particularly on the security for costs application. With some reluctance, I adjourned the hearing for a week on strict terms about the further exchange of evidence.
2. Since 12 December 2011, the Claimant has served four further witness statements (Messrs Rees, Lopacki, Robbins and Taylor), lodged with the Court on 16 December, and the Defendant served a statement of Mr Tomlinson on 16 December 2011. Coincidentally, the Claimant has issued its own application for specific disclosure on 16 December 2011 with a return date of 22 December 2011. On 19 December 2011, the Claimant served a statement from one of the administrators, Mr Smailes, which was handed to me as I came into court.

The Background

3. In about 2006 the Defendant was retained as the main contractor by the John Lewis Partnership to carry out refurbishment works at its flagship Oxford Street store in London. The Defendant retained the Claimant as a sub-contractor to carry out asbestos removal works on this project, unsurprisingly much or all of the work or all being carried out outside normal opening hours. There are (at this stage) immaterial issues as to whether there was one sub-contract or two. The various sub-contract works were said to have been extended over longer periods perhaps than had been previously anticipated. The Claimant sub-sub-contracted substantial elements of the work to T&S Multi Services Ltd ("T&S") of which Mr Rees was the owner. One or more final accounts were submitted by the Claimant to the Defendant.
4. In July 2009, administrators were appointed in relation to the Claimant and, as their most recent report signed on 26 July 2011 states:

"2.4.1 The Joint Administrators "assigned two Company debtors [sic] to Asbestos Contamination Services Limited ("ACSL"). Mr Lopacki, a Director of [the Claimant] is a Director and Shareholder of [ACSL]. Mr Lopacki sought independent legal advice prior to assignment.

2.4.2 ACSL are pursuing these debtors on the basis that a percentage of the realisations shall be paid to the [Claimant] for the benefit of creditors. The assignment was made in order to ensure that no cost order could be made against the [Claimant] whilst ensuring a successful action would be of benefit to the creditors of the company. The Joint Administrators undertook the assignment following advice from Naismiths Ltd, independent professional appraisers with specific knowledge of the construction litigation."

The report concludes with noting that the administrators should give full support and assistance to ACSL in its action against the Defendant.

5. The litigation presaged in that note was instituted by the Claimant on 13 December 2010 in the TCC. In summary the Claimant claims a gross sum of £6,466,840.32, less £3,249,968.69 paid, leaving a balance said to be due of £3,216,871.63. It is clear from the 100 pages or more of attachments that the Claim is divided into 10 elements and substantial elements relate to what is said to have been claimed by T&S. The Defence and Counterclaim asserts that that the gross sum due is £2,784,526.30 on a like-for-like basis and that there has correspondingly been an overpayment of just over £555,000, which is the subject matter of the Counterclaim. Some 10 schedules are attached which seek to identify what the Defendant accepts is due.
6. The parties agreed that it would be sensible if the five largest areas of claim were dealt with in the first trial to take place in March 2012. This and other directions were given at the Case Management Conference on 6 May 2011
7. On 13 July 2011, the Defendant issued an application for security for costs and a date, 3 August 2011, was fixed for the hearing. That was supported by a witness statement of the Defendant's solicitor, Mr Tomlinson. The exhibited costs estimate exclusive of VAT was just over £278,000. The parties however came to an accommodation in relation to this application whereby the Claimant undertook to provide security for "the Defendant's costs of the claim up to the stage of the exchange of experts' reports in the sum of £144,000" to be paid into court. The consent order was made expressly "without prejudice to...the Claimant's right to maintain its position that the Defendant is not entitled to payment of security in this case or to maintain that no further security should be provided in the future [and] the Defendant's right to make any further application for security for costs in this case which it considers appropriate". This order was complied with by the Claimant.
8. I have set out above what happened in relation to the current security for costs application. It seems that only two of the statements initially served by the Claimant went to the security application (Messrs Taylor and Rees).

The Security Application-The Law

9. So far as is material to this case, the law and practice relating to security for costs was set out in Michael Phillips Architects Ltd v Riklin & Anor [2010] EWHC 834 (TCC):

"12…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 for 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."

10. That case also considered the impact of After the Event ("ATE") Insurance on security for costs applications. The Court summarised the impact of previous authorities on this aspect at Paragraph 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 Security Application-Evidence and Argument

11. It is common ground that the Claimant's financial position is such that the threshold for the exercise of the discretion has been passed. The Claimant is not trading any more and, although superficially if all the company's recorded debtors pay what is said to be due from them, it would be solvent and indeed profitable, the largest alleged debtor is the Defendant and that "debt" is wholly disputed; if the Claimant's claim largely fails, the Claimant will be insolvent to the tune of some £1.6m.
12. The Claimant relies upon a number of points:

(a) Its claim will be stifled by a further security requirement.

(b) The Counterclaim should be taken into account and security should not be granted.

(c) The Claimant's impecuniosity has been caused or contributed to by the Defendant's failure to pay sums due to it.

(d) ATE insurance worth £250,000 has been obtained.

(e) The amount of security sought overall (c. £280,000) is in any event excessive.

The Defendant challenges all these points. It argues that the evidence about stifling was and remains "thin", that the Counterclaim is simply a consequential reflection of the Defence and that it has no independent "vitality", that the impecuniosity point is not established, that the ATE insurance does not provide any or any significant comfort and that something between two-thirds and three-quarters of the overall costs should be provided by way of security. It also asserts that part of the reason for the costs being increased above the earlier estimate relates to procedural incompetence and delay on the part of the Claimant.

13. The Defendant's evidence in support of the security application is primarily contained in the witness statement of Ms Shelston, albeit supported by the earlier witness statement of Mr Tomlinson which supported the previous application, together with Mr Tomlinson's more recent statement. The costs schedule attached to her statement shows a current total costs estimate of £335,428.02 which is an increase of about £57,000 over the earlier estimate. Some of the costs increase relates to the various further applications which have been addressed since the earlier application; about £128,000 relates to costs yet to be incurred. Additional security in the sum of £135,952 is sought, which in addition to the sum of £144,000 security already provided, would bring the total security to just under £280,000. Mr Tomlinson's first witness statement highlighted the assignment issue. Mr Tomlinson's second witness statement highlights the Administrators' latest report which suggests that the alleged debt due from the Defendant to the Claimant has been assigned to ACSL. He also cast some doubts about the financial position of the ATE insurer as well as the effectiveness of the ATE insurance itself in providing adequate security. He points to the ATE insurance providing cover not only for the Defendant's costs but also the Claimant's disbursement costs which have been estimated at over £289,000 which primarily includes expert and Counsel costs and a sum of £127,000 for the insurance itself, albeit that this may be the insurance premium which is not payable until after the case is concluded.
14. The Claimant's evidence although arguably deficient in detail at the time of the first hearing now addresses the following points in relation to these security application:

(a) Mr Taylor in his first witness statement dated 9 December 2011 says on instructions that "a major cause of [the Claimant] having to go into Administration was the Defendant's failure to properly reimburse it for the works it undertook on the John Lewis Partnership project in question". He says that the £144,000 sum paid into court related to the period up to and including exchange of experts' reports. He explains that T&S is the "major creditor by far" and that it too has become insolvent as a result of significant underpayment to it. He says that the original application for security was very late in the day. He says that the Counterclaim arises out of the same facts and circumstances of the claim and "it is difficult to see what if any costs are being saved as the costs would be incurred in any event in relation to the Counterclaim." In this first statement, he simply refers to the existence of the ATE insurance with costs cover of £250,000 and accepts that "there are arguments that such cover is not 100% guaranteed" albeit he suggests "at the very least the Defendant's exposure is significantly reduced by such a policy." He points to the fact that an undisclosed payment certificate from John Lewis's quantity surveyor demonstrates that a sum of just under £29,000 was certified as due. He gives some evidence that the case is being funded by Mr Rees, a director of T&S and that this funding has come from family, friends and acquaintances; although he is responsible for all disbursements "and a small monthly retainer" to Mr Taylor's firm, he has been struggling to meet this commitment and is behind some months in payments. Mr Rees' first statement dated 12 December 2011 confirms that he is funding the claim, it having been initially funded partly by Mr Lopacki. He explains that he no longer has his business and is now in employment. He says that he will be unable to make any payments towards the provision of further security and explains that he and his wife separated and he is now funding two households. It is a short statement.

(b) Mr Taylor's second statement attaches the ATE insurance policy, albeit somewhat redacted. He confirms that his firm is instructed by the Administrators of the Claimant but he does not address the issue raised by Counsel for the Defendant at the first hearing relating to the assignment of the Claimant's claims against the Defendant to ACSL.

(c) Mr Rees goes into much more detail about his personal financial position. Thus he explains that T&S claims against the Claimant just over £2.2 million plus interest. Since its ceasing work, he has worked as a bricklaying contractor until August 2011 since when he has been employed by his son, being paid £1600 per month which after outgoings leaves him with about £200 per month. His wife lives in the matrimonial home and, although he jointly owns a one acre farm, there is little equity in it and his sons have taken over the payment of the mortgage in return for the property. He has £12 savings and is in debt on personal guarantees to the tune of some £48,000. He accepts that he owes the Claimant's solicitors, about £20,000. He says that he has borrowed money over the last year from various people but there is little or none left to be borrowed. He borrowed the £144,000 provided as security for costs from three named individuals. He attaches a number of corroborative documents.

(d) Mr Lopacki's witness statement explains that he has found it financially difficult to continue to fund the case due to debts, reduced income and living expenses and commitments. The potential return to him, he says, has diminished particularly in circumstances in which T&S is by far the largest creditor and there will be little or no equity left in the Claimant after any debts are paid off, to the extent that the claim succeeds. He believes that it is "unrealistic to expect Natas to recover its claim in full". He says that he simply does not have the available funds or income to fund the claim. He has "several business debts following the fact that Natas went into Administration and I am committed to grow my current company". His income has dropped and his outgoings continue to rise and he is "not willing or able to fund the case against" the Defendant. He does not address the assignment to his other company. He gives no detail of his financial position. There is another statement from another creditor, a Mr Robbins, who has provided quantity surveying services to the tune of some £60,000. He says he does not have savings or spare income, as his wife recently gave birth to twins.

(e) Mr Smailes, one of the administrators, provided a very late short statement. He says that he his report of July 2011 contains an error and states simply:

"4. There were 2 deeds of assignment entered into between Natas (executed by the Administrators) and Asbestos Contamination Services purporting to assign 2 debts owing by [the Defendant] to Natas. Both [the Defendant] and Mr Tomlinson are aware that the Birmingham County Court found that the assignment of the Lloyds Bank project debt was ineffective as an assignment. As both the assignments were identical, simply a different project, the purported assignments of the debt due on the John Lewis project Debt was also ineffective. Accordingly a new arrangement was entered into whereby Max Lopacki was appointed by the Administrators to recover the debt at his cost.

5. Subsequently Max Lopacki could no longer afford to fund the claim and a similar agreement was entered into with Anthony Rees whereby he would on behalf of the Administrators collect in the debt at his cost."

No details of these arrangements or agreements are provided.

15. The ATE Insurance is provided by a Lichtenstein company and the premium is, I infer from a Claimant's cost estimate, although redacted, £127,000 which is virtually 50% of the limit of indemnity. The cover excludes "own solicitor costs" but includes "own disbursements". The premium is to be deferred until after the insured receives "their damages" and cover is retrospective from 1 December 2010. It envisages that there will be a Conditional Fee Agreement albeit it is not a requirement. Special Condition 1 is:

"In relation to condition 5(a) of the policy wording, No claim would fall to be paid under the ATE policy unless the client(s) lost entirely on all heads of their claim and any counterclaim from the opponents and an order for costs was made against them save for the deficiency in damages".

"Deficiency of damages " is defined as arising where "any Opponent's Legal Costs, Funded Own Legal Costs, Funded Disbursements, Premium, and Loan/Funding interest and Fees that the Insured is liable to pay…exceed the total amount of Damages and costs awarded to the Insured against the Opponent in the event of a claim reaching a Successful Conclusion". "Successful Conclusion" is defined as being one "where the Insured is awarded an amount in respect of damages and or costs". The Limit of Indemnity is the "aggregate amount payable by the Insurer under this policy in respect of Opponent's Costs, Own Disbursements, Own Costs, interest, funding fee and VAT if applicable".

16. Clause 1 requires the Insured and its legal representative to "conduct the Proceedings with due care and diligence and…take all reasonable steps to minimise and/or avoid the costs and expenses payable under the Policy…" Clause 5 (a) states:

"The Insurer shall only be liable to make a payment under this Policy either:

(i) the Court orders the Insured to pay Opponent's Legal Costs and the Proceedings are not subject to any further legal action; or

(ii) the Legal Representative advises that the Insured has no reasonable prospects of success and the insurer has given its prior written consent to and agreed the terms of the compromise, discontinuance or withdrawal of Proceedings including the terms of such a settlement."

Clause 8 provides:

"In the event of misrepresentation, misdescription or nondisclosure of any material particular by the Insured in relation to either the formation of the contract of this insurance or the conduct of the Proceedings, the Insurer shall become entitled to avoid this Schedule forthwith upon giving notice of such avoidance to the Insured and the Premium paid to the Insurer shall be forfeited."

Clause 9 makes it clear that no person, not a party to the policy, has any right to enforce any terms of the policy.

17. There are, as usual, exclusions whereby the insurer is not liable to indemnify in the following circumstances:

"6. Proceedings which had been conducted in such a manner that, in the reasonable opinion of the Insurer, their position as insurers has been prejudiced as a result of the delay or other default by the Insured or the Legal Representative, save where such delay does not occasion material loss…

9. No claim shall fall to be paid under this policy unless the Insured has lost entirely on all sections or heads of the claim and any counterclaim from the opponents and a costs order has been made against the Insured unless specifically agreed otherwise in writing by the Insurer…"

18. Under the heading "Termination", the following appears:

"2. In cases where the Insurer is informed (or should have been informed) of any material development the Insurer may at its absolute discretion withdraw the benefit of this Policy and will have no liability to make any payment under this Policy from the date upon which the Insurer was notified or should have been notified of such material development. The Insurer shall provide the Insured with the written notification that the benefit under this Policy has been withdrawn."

Discussion

19. Given the current financial position of the Claimant, namely that if it substantially fails in its case, it will be unable to pay any significant costs order made against it in favour of the Defendants, the threshold for security for costs has been passed. It is therefore incumbent on the Court to exercise its discretion.
20. I first consider the issue relating to "stifling". The Claimant's claims are substantial, exceeding as they do £3 million, but, it appears, that neither Mr Lopacki nor the administrators nor at least some of those advising the administrators believe that the claims are worth anything approaching that figure. The Administrators identified in their progress report dated July 2010 (Paragraph 4.3.2) that "the estimated amount owing to non-preferential unsecured creditors is approximately £1,216,994"; elsewhere a list of total creditors comes to just over £1.7 million. Elsewhere T&S is identified as a creditor in relation to a sum just over £1 million. In their progress report of 17 January 2011 a similar figure (adjusted upwards by some £3,000) was identified. In their "proposals" dated 18 September 2009, they refer to the sub-contract at the John Lewis store, identify an overall net claim of over £3 million but refer to work done by Naismiths LLP (professional Quantity Surveyors) and the Claimant's Quantity Surveyor, Mr Robbins (from whom a statement was obtained for this application) and state:

"2.19 Naismiths LLP advised that the Company's last application to payment, an unpaid balance of approximately £2 million, remained outstanding. However, Mr Robbins acknowledged that the claim is overstated in certain areas and considers that a recovery of up to £1,200,000 is more realistic."

The amount of £1,217,526 is identified as the amount claimed by non-preferential unsecured creditors in their Administrators' most recent report dated 26 July 2011. Mr Lopacki in his witness statement clearly believes that there is nothing in it for him to continue to fund the claim: he says that he would be "paying good money for no potential gain"; that suggests that the proceeds from the litigation will leave nothing to him, in his estimation. Debtors are said to be over £3m, which presumably includes sums said to be due from the Defendant

21. It is very difficult and it would be undesirable at this stage for the Court to form any view as to the likely outcome. However, the Court can take into account, where there is evidence to show it, what the Claimant itself considers the claim is worth. The Administrators in their latest report identify, by inference at least, a T&S claim of no more than about £1 million, as opposed to the £2 million identified elsewhere in the evidence on this application. The Claimant's own in-house quantity surveyor valued the claim against the Defendant at "up to" £1.2 million. This suggests that the Claimant's own published estimation is of a claim which is worth no more than between 30% and 40% of its normal value.
22. Whilst I do consider that the evidence demonstrates that T&S and Mr Rees has most to gain from the pursuit of the Claimant's claim and that T&S and Mr Rees are in significant financial difficulties, I am concerned at the absence of detail and corroboration from the Administrators. I am particularly concerned at the brevity of Mr Smailes' statement. The statement is inconsistent with the important and official progress report issued by him and the other administrator as recently as 26 July 2011. He simply says that the reference to assignment to Mr Lopacki's new company is an error. That assignment, a copy of which is not provided, has not, apparently, been cancelled by agreement. There is reference to a Birmingham County Court judgement said to find that an assignment in identical wording was ineffective; a copy of that judgment is not provided. The assignment dated September 2009 was, as earlier reports suggest, effected on legal advice both to Mr Lopacki and to the Administrators. Mr Smailes confirms that at some time "a new arrangement" was entered into whereby Mr Lopacki was appointed to recover the debt at his cost. However, no details are given of this "arrangement", albeit there is a clear suggestion that there was some sort of a binding agreement. No details are given of the agreement between the Administrators and Mr Rees. It is not clear whether these arrangements or agreements are enforceable, albeit it appears that they are.
23. Mr Lopacki's evidence is in the light of Mr Smailes' evidence equivocal. He gives no real detail of his financial position although he does make it clear that he is not prepared or willing further to fund this litigation because he now thinks there is nothing in it for him. He does not mention the assignment. It is clear that he has a company which is growing.
24. In short, I am not satisfied that there will be a stifling of the claim. What has to be found by or on behalf of the Claimant in the light of the Conditional Fee Agreement (which appears likely to cover the solicitors' fees and the ATE Insurance which amongst other things covers the other legal costs, such as Counsel and expert fees) is, in the interim, payments on account for the Claimant's disbursements, which will be substantially repaid by the ATE insurer if the Claimant's claim fails or, all things being equal, by the Defendant if the claim against it substantially succeeds.
25. I do not consider that the point raised by the Claimant about the Counterclaim is on analysis a good one. The substantive defence put forward by the Defendant is that the Claimant is not entitled to any of the sums claimed. The relatively detailed schedules to the Defence identify against the 10 areas of the Claimant's claim what the Defendant says is the gross sum due. That shows on its face an overpayment to the Claimant, which is then counterclaimed. I can not see or accept that the Defendant would ever have bothered to claim anything from the Claimant, given the financial position as recorded by the Administrators, of the Claimant; put another way, if the Defence succeeds, the Claimant will then be established as hopelessly insolvent and not worth proceeding against further.
26. I also find it difficult to see how I can be satisfied to any significant degree if at all that the impecuniosity of the Claimant has or could well have been caused by the Defendant. Of course, if the Claimant's claim is truly worth more than £3 million, then the current impecuniosity has obviously been caused by the non-payment, earlier, by the Defendant. Again, it is difficult for the court to form a view on this point because it is not readily open to the Court to form any view on the merits of the Claim or the Defence. There is some evidence that John Lewis's Quantity Surveyors were of the view that a small sum of about £24,000 was due and remained unpaid to the Claimant by the Defendant; however failure to pay that sum (if it was a failure), does not account for the current impecuniosity.
27. The ATE insurance however does provide a degree of comfort, albeit not nearly as much as the Claimant suggests. The £250,000 cover does cover the Defendant's costs but it also covers the Claimant's disbursements. Those were estimated as at February 2011 to include £289,710 for disbursements albeit £127,000 of this relates to the insurance premium. The disbursements exclusive of that premium are some £162,000. It could be said that this net figure is nominally available to cover the Defendant's costs. However, this cover does not provide any where near as good or as certain cover as a payment into court or a bank guarantee, which are the more usual ways of providing security for costs. Genuine concerns and uncertainties relating to this ATE insurance are:

(a) It can not and should not be incumbent on the Court on a security for costs application to determine with any precision what the insurance policy, properly construed, actually is. What the Court can do is to identify risks and uncertainties and weigh them in the balance on the exercise of the discretion.

(b) Special Condition 1 could be read, in conjunction with Exclusion 9, as meaning that the insurer might not be liable if the Claimant succeeded on a section of its claim, say for instance, the claim identified in Schedule 1 to the Particulars of Claim, but lost overall because there were over-payments or excessive allowances on the other nine heads of claim. It could be read as meaning that, if the Defendant only succeeded on its Counterclaim to the tune of say 10%, there would be no liability on the insurer. I regard this as a not insignificant risk albeit that one would hope that any decent insurer would not take the point. There is no evidence before the Court about the pedigree of this Lichtenstein insurer. Additionally, if there has been or is to be a Part 36 offer made by the Defendant and if it was effective in that the Claimant "won" but did not "beat" the offer, there is an even greater chance that the insurer could argue that it had no liability at all to pay out anything.

(c) The termination Clause 2 is a worrying clause in the sense that there is no definition of what "material development" could lead the Insurer to withdraw the benefit of the Policy. It is highly arguable that a material development might be the discovery that a key witness can not support, any more, a significant part of the claim or that such a witness is not prepared to co-operate with the Claimant any more. If that is right, the insurers could pull out and the Defendant would be left with no security.

(d) Clause 8 has ramifications in respect of and over which neither the Court nor the Defendant can be aware or have any control. The Administrators will have procured this insurance, I presume, on the presentation of evidence and opinion supporting the Claimant's position. Whilst of course the Court does not expect these privileged documents to be put in front of it, it is at the very least reasonably arguable that any material misrepresentation or non-disclosure can lead to an avoidance of the policy, which would be retrospective in effect. It is of course not necessary that there should have been any fraud on the part of the Administrators.

(e) There is at least some confusion in the drafting of the policy as to how the premium is dealt with in circumstances in which there is an overall order for costs against the Claimant. The premium comes into the "deficiency of damages" calculations.

There is no certainty also that the disbursements of the Claimant will stay at the level suggested in their February 2011 estimate of costs or that breaches of the policy could not lead to the reduction in the cover available.

28. There has been no particular challenge to the total estimate of costs put forward by the Defendant and I can safely take the gross sum of £335,000 as an appropriate estimate. It is fair to assume at this stage at least that, if the Defendant succeeds and secures a costs order in its favour, costs would be awarded on a standard basis. It is common or at least not uncommon for something between two-thirds and three-quarters to be assessed on that basis. I take as a mean 70%, rounded up to £235,000. However, I discount that figure by £55,000 to allow for two factors, the first being a real chance that some part of the ATE insurance may be available, particularly taking into account that there is already £144,000 paid into court by way of security, and secondly the real possibility that sensible parties will try to resolve this case amicably. I therefore consider that a reasonable gross sum by way of security would be £180,000, which, given that £144,000 is already in court, leaves the sum of £36,000 to be provided. Given the difficulties described by Mr Rees and the current unwillingness of Mr Lopacki to assist, it would be fair and help avoid any possible stifling of the claim, to stagger the times at which this additional sum should be provided. Thus, £12,000 should be provided by 20 January 2012, a further £12,000 by 10 February 2012 and the final £12,000 by 2 March 2012.

Decision

29. The Defendant's application for security for costs succeeds and the Claimant, in addition to the £144,000 paid into court earlier this year should be paid a further £36,000 in instalments as described above. For reasons given orally, the Claimant should pay 75% of the Defendant's costs of the security application to be assessed on a standard basis.