Shareholder indemnities not to be treated like ATE insurance policies for security for costs purposes

In Dunn Motor Traction Limited v National Express Limited [2017] EWHC 228 (Comm), the High Court held that only in an exceptional case will a shareholder undertaking to indemnify the claimant company in respect of its liability for a defendant's legal costs be a factor to consider when determining whether the claimant would be in a position to pay the defendant's legal costs (and therefore whether security for the costs of the defendant should be provided by the claimant).

What is the court's approach to ATE insurance policies?

It is well established that where After The Event ("ATE") insurance policies are in place, the question for the court is whether there is reason to believe that the insurer will not pay under the policy when called upon to do so (Premier Motorauctions v PWC [2016] EWHC 2610 (Ch)). The claimant argued in this application that a similar approach should be taken in relation to the shareholder indemnity to the claimant company, and that there was no reason to believe that the shareholder would not honour his indemnity.

Even before the Premier decision in 2016 it had been noted in Geophysical Service Centre v Dowell Schlumberger [2013] EWHC 147 (TCC) that the 'funding of litigation by ATE policies has been a central feature of the ability of parties to gain access to justice'. Later cases also confirmed that an ATE insurance policy may be a 'reliable source of litigation funding'.

What is the difference between ATE insurance policies and shareholder indemnities?

Teare J held that ATE insurance policies and a shareholder indemnity should not be conflated. The principles established relating to the use of ATE insurance policies in applications for security for costs should not be applied to shareholder indemnities. Such indemnities are not generally reliable sources of third party litigation funding, unlike ATE insurance policies. They are not regarded as enabling parties to gain access to justice and nor is there any public interest in permitting a sole shareholder to indemnify a company in order to provide access to justice.

So, if there is no ATE insurance policy in place, the correct question to ask when considering an application for security for costs is whether there is reason to believe that the company will be unable to pay the costs of the defendant if ordered to do so. Only in an exceptional case will such a shareholder indemnity be taken into account, if, otherwise, a company would not be in a position to pay the defendant's costs. The present case was not exceptional.

Disclosure of identity of funders ordered, but not of ATE policies

An application for security for costs may be made by a defendant against a non-party (CPR 25.14). In The RBS Rights Issue Litigation [2017] EWHC 463 (Ch) the defendants applied for an order requiring the claimants to provide:

• the identity of third party funders who fell within CPR 24.14(2)(b); and 
• details of the ATE insurance policy held by the claimants, or confirmation that neither the claimants, nor the persons falling within CPR 25.14(2)(b), would rely on such a policy in opposition to any application for security for costs. 

The defendants applied for this order in advance of a potential security for costs application, on the basis that the information was necessary to enable them to determine whether to apply for security, either against the claimants' funders or the claimants. 

Hildyard J. granted the applications in part – the claimants were ordered to disclose the identity of the funders, but not to disclose details of the ATE insurance policies.

Identity of funders

The judge agreed that the applicant must demonstrate that an application for security for costs was a real possibility, but said that it need not show that it had unequivocally decided to bring such an application once the details were revealed – such a test would be difficult to apply. 

The judge observed that 'commercial funders were routinely in the front line'. He noted that in the context of group litigation, such as this, enforcement may be sought against the funders because proceedings are often only possible with their financial assistance. Funders may therefore also be exposed to security for costs applications. Here the defendants sought the information to allow them to consider making such an application, so it was not his task to consider the merits of that application. 

Disclosure of ATE policy

The defendants also contended that they needed to know whether the claimants had adequate ATE cover, and the details of such cover, to decide whether applying for security for costs was necessary, and likewise whether the claimants were intending to rely on such a policy to thwart any security for costs application. 

Hildyard J conceded that the court's case management powers under CPR 3.1 could extend to requiring disclosure of an ATE policy, when necessary to enable the court proportionately to exercise its case management function. However, this was not an exceptional case, so he declined to order the claimants either to disclose or disclaim reliance on the policy.

Reference to confidential communication in a statement of case does not waive rights of confidentiality

Facts

The Defendants (D) applied to the court for declarations that a prospective witness (M) had been released from duties of confidentiality owed to the claimant (C).
C had already agreed a protocol with D that permitted M to discuss certain topics with D prior to trial.

D now needed to go beyond those topics in discussions with M. A confidential letter between C and M had been disclosed to D in the course of the litigation which was relevant to a pleaded issue. D asked the court for a declaration that C had waived confidentiality with the result being that M could speak freely regarding its content (despite the issue not having been covered by the protocol between the parties).

Waiver of confidentiality

The leading decision on confidentiality of witness evidence is Porton, which held that even where confidential communications have been referred to in disclosed documents it does not follow that a potential witness owing a duty of confidentiality to the disclosing party is free to talk about such matters prior to trial with a third party or that the disclosing party has waived confidentiality.

However, if the party who owes a duty of confidentiality is called as a witness and is asked a question relevant to the dispute at trial, even if the answer would be breaching duties of confidentiality, the witness is then obliged to answer.

Distinction between waiver of privilege and waiver of confidentiality

Privileged communications cannot be referred to at trial at all, unless privilege is waived. By waiving privilege the party makes the question of advice received in the document a matter that can be explored at trial.

In contrast, a party cannot resist a confidential communication being introduced or prevent a witness being asked about it at trial, where the issue is relevant. However, the reference to confidential information in a statement of case does not waive duties of confidence.

Implications

A potential witness may choose to assist any party before trial, but risks breaching duties of confidentiality by doing so. A witness may however be compelled by the court to provide evidence at trial (Porton).

Full investigation and trial preparation will therefore be tricky for a party unable to "bottom out" the evidence of a witness in relation to relevant confidential matters, as in this case.

Outcome

• The Judge affirmed the Porton case regarding waiver of confidentiality.
• By referring to the confidential topic in its pleadings the claimant had not released a third party who owed it duties of confidentiality, so the third party could not without breaching confidence discuss such matters with anyone in advance of trial. 
• A witness' obligation to answer relevant questions at trial overrides duties of confidentiality.

Glenn and another v Watson and others [2016] EWHC 3259 (Ch)

Do employers have a duty of care to employee witnesses in the course of civil litigation?

Police officers sought to recover damages against the Defendant (CPM) for reputational, economic and psychiatric harm resulting from errors allegedly made by the CPM and its legal advisers (DLS) in the course of settling a claim against CPM/DLS.

DLS applied to have the officers' claim struck out (CPR 3.4(2)(a)) or that summary judgment be entered against them (CPR 24.2(a)(i) and (b)). The Court of Appeal, disagreeing with the judge, refused to strike out the claim in its entirety, leaving open the possibility that employers may, in some circumstances, owe employee witnesses a duty of care in relation to the conduct of litigation.

Facts

The four claimant police officers were involved in the arrest of a terror suspect (BA). BA alleged he was assaulted during his detention and issued a personal injury claim against the CPM as the person vicariously liable.

The personal injury claim was defended with CPM represented by the DLS, their in-house legal team. The officers attended a conference with DLS where they were allegedly told that the DLS was acting in their interests and that the claim would be defended.

CPM later settled the claim with admissions of all but one allegation of gratuitous violence and the issuing of a public apology.

Was there a duty of care to the officer – witnesses?

CPM accepted that he owed duties to take reasonable steps to protect the officers from reasonably foreseeable physical or psychiatric harm. However, it was not clear that such a duty extends to the conduct of litigation.

The officers' case was that it was foreseeable that their reputations and promotion prospects would be damaged by any public admission of liability and, that the decision to settle was influenced by failings by the police to identify or make available certain important pieces of evidence available (failing to preserve officers' notebooks as well as CCTV and audio recordings of BA's time in custody), which breached duties owed to the officers by CPM. The Court of Appeal agreed that this was arguable.

Solicitor and client retainer?

The officers had also alleged that they had an implied solicitor/client retainer with DLS, but the Court of Appeal noted that they had attended the conferences with the DLS and counsel as witnesses only: they were not parties to proceedings and were never likely to be. Nothing was communicated to them that could give rise to a contract of retainer, so the judge's decision to strike out this element of the claim was upheld.

Outcome

• It was held to be arguable that CPM settling the personal injury claim was influenced by failings in police procedure (breaching common law duties to the officers) which foreseeably could have caused them economic and reputational harm, (but as this was merely a strike out application there is no finding on the point)
• The claim based on an implied contract of retainer remains struck out.

Rod James-Bowen, Nigel Cowley, Mark Jones, John Donnohue v Commissioner of Police for the Metropolis [2016] EWCA Civ 1217

Full and frank disclosure when applying to serve claim form out of the jurisdiction

Where any application in the course of legal proceedings is made without notice to an opponent, the applicant must disclose all material matters to the court. This includes disclosing all relevant legal principles, whether or not favourable to the applicant.

In Gunn v Diaz the claimants obtained permission to serve the claim form out of the jurisdiction on the basis that their claims against the defendants were in tort and that damage had been sustained by them in this jurisdiction in the form of financial losses. But, after permission was given, the Court of Appeal ruled in another case, Brownlie v Four Seasons, that "damage" within the jurisdiction for the purpose of a tort claim in respect of which permission was sought to serve out of the jurisdiction (CPR PD 6B 3.1(a)) means direct damage, not including consequential loss.

After the Brownlie decision the claimants in Gunn obtained from the court two extensions of time for service of their claim forms. They then served them and later obtained judgments in default against two of three defendants. However, as the judge put it, at the time of those applications for extensions, the "sole legal basis for the service that the claimants were asking the court for more time to effect, had disappeared". A third defendant challenged the jurisdiction of the English court.

In dealing with the successful application by D3 to set aside service of the claim form the judge said that the claimants' solicitor should have realised that it was obvious that a court would wish to know that the order permitting service out of the jurisdiction had been obtained on the basis of a misinterpretation of the rules, with the result that the legal basis for service had disappeared.

The judge attempted to clarify the extent of the duty of disclosure. She declined to exercise her discretion to permit the claimants to rely on an alternative ground of jurisdiction against INS, the "necessary and proper" gateway ground, because it appeared that there would have been no permissible claim against the first, anchor defendant. Moreover it would have been unjust for the court to allow the claimants to achieve any advantage from their culpable failure to disclose all material facts to the court when they sought the second extension of time for service.

The decision is a stark reminder that the duty of full and frank disclosure applies to any without notice application (including those for extensions of time) and that the consequences of non-disclosure can be far reaching: the judge invited submissions as to whether she should also set aside the original order for service out as against all the defendants – which would have implications for the default judgments against the other defendants who were not before the court on this application by D3.

For another recent application of the principle that full disclosure is required for an application without notice, this time in the context of a charging order application, see Ittihadieh v Metcalfe (unreported, but summarised in an article in the Solicitors Journal – here)

Clarification of meaning of "third party proceedings" for purposes of Brussels Regulation on Jurisdiction and Enforcement of Judgments (Article 8(2))

Article 8 of the Brussels Regulation is used to permit the jurisdiction of the English courts over defendants against whom a claimant has a claim connected to a claim against an "anchor defendant" under another Article of the Regulation, but in respect of which the English Courts would not otherwise have jurisdiction. Article 8(2) expressly allows third parties to be joined to the original proceedings "unless these were instituted solely with the object of removing him from the jurisdiction of the court which would be competent in his case". In other words if the anchor claim is merely a vehicle for getting the other defendants before the English court the claim will not fall within Art 8(2).

The Commercial Court, in PHP Tobacco v BAT Caribbean SA and Ors, held that "third party proceedings" in Article 8(2) meant any proceedings between one or more of the existing parties and one or more other parties. The meaning was not restricted to proceedings that were equivalent to a claim by a defendant for an indemnity or contribution against the very liability asserted by the claimant. It also held that the exception in the last part of the Article required a close connection between the matter raised by the original proceedings and the proposed new claims, and that the connection would be sufficiently close if it gave rise to a risk of irreconcilable judgments.

In this case the court held that there was a clear and close connection between the original claim concerning a distribution agreement with an English exclusive jurisdiction clause and the third party claim concerning an alleged VAT recovery agreement.