NON-PARTY COSTS ORDER AGAINST INSURER: UNTANGLING THE WEB

In Various Claimants v Giambrone & Law (a firm) & Ors [2019] EWHC 34 (QB) a non-party costs order was made against the defendant insurers.  It provides a (fairly complex) example of a court determining a non-party order. This “summary procedure” lasted four days.  The judge had much to say about the defendant’s conduct of litigation.

“In my view, where an indemnity insurer substantially relinquishes control of the conduct of the litigation to the insured (or fails to take steps to control it when there are grounds for intervening), and does so in the expectation that it will be immune from a costs liability towards the opposing party if the opposing party is successful, that expectation is open to be falsified by the court in a section 51 application, particularly if the prospects of success for the insured are assessed as poor.”

THE CASE

The claimants succeeded in a professional negligence action against the defendant firm.

A SUMMARY PROCEDURE OR A “TANGLED WEB”?

This summary procedure took over

  1. The procedure involved in the present application is a “summary procedure”: see Symphony Group plc v Hodgson [1994] QB 179, 193. Notwithstanding that, the documentation placed before me occupied 10 lever arch files, there were 2 bundles of authorities, extensive Skeleton Arguments and a hearing lasting over 4 separate days. Some of the documentation, particularly the correspondence, is labyrinthine and some aspects of the narrative weave a tangled web with Avvocato Giambrone at the centre.

THE DEFENDANT’S CONDUCT OF THE SUBSTANTIVE CASE

Mr Justice Foskett (who had been the trial judge) made some trenchant observations about the conduct of the main case.
    1. I returned to this matter at [86] in the supplemental judgment as follows:
“I would make two observations; first, I would merely emphasise the unsatisfactory insurance position referred to in paragraphs 71 – 77 of the main judgment such that the litigation seems to be capable of being conducted on the Defendants’ side with complete immunity as to costs (the individual Defendants claiming impecuniosity, whether such claims are justified or not, when faced with orders for costs incurred when any aspect of the insurance-funded litigation goes against them). Second, I sense that the tactics in this case (going back over many years) have been to delay any potential adverse finding so far as Avvocato Giambrone is concerned whilst the number of firms bearing his name has continued to expand on a worldwide basis. From an outsider’s perspective, this approach appears to have dictated the settlement pattern prior to the cases chosen as exemplar cases coming before me. Indeed there was a settlement of an exemplar case concerning another development in Calabria (the El Caribe development) that I was due to consider as part of the generic issues trial shortly before the trial commenced (see paragraph 9 of the main judgment). Since the judgment was handed down I have sensed that efforts to delay any further adverse consequences for as long as possible have been taking place.”
    1. As will appear below, I now know more about how the unsatisfactory position, as I perceived it, came about, but I would have thought that any reasonably well-informed layman would have regarded the way the litigation was conducted on the Defendants’ side from the point of view of the costs position as unbalanced and, at first blush, unfair.
    2. I might add that, despite the Claimants succeeding on all substantive points, the Defendants (presumably on AIG’s instructions) made an application for payment of their costs. The application did not succeed. Although the Defendants initially took the position that I should not make any decision on the question of costs until the whole case had been concluded and said that I should not be placed in the position of seeing certain “without prejudice” material at that stage, I ruled against those contentions in a ‘Provisional Ruling on Costs’ dated 12 February 2016 (which, since it is not already in the public domain, is attached as Appendix 1 to this judgement). Following further written representations (in the context of which certain “without prejudice save as to costs” offers were referred to), I made a ‘Final Ruling on Costs’ dated 19 May 2016 (which is also attached as Appendix 2 to this judgment). In that final ruling, I made the following observations:
“As I observed in paragraph 10 of the main judgment, almost every issue raised by the Claimants was “hotly contested”. A few matters were conceded during the trial, but all major issues were fiercely fought by the Defendants. The revelation of some of the “without prejudice” material indicates that the Defendants had little confidence in success on many of the major issues, but nonetheless the proceedings were fought and no admissions or concessions were made on the principal issues that formed the subject matter of the trial. That position was maintained throughout the trial even though many individual claims had been settled prior to the hearing.”
“All this is only relevant to the proposition that a very great deal of the time at the trial was spent in litigating issues about which there appears no longer to be a dispute and about which there was little confidence of success prior to the trial. Notwithstanding that situation, I am being asked to award the Defendants the costs of the trial.”

DID THE INSURER HAVE ANY CONTROL OVER THE LITIGATION

The judge considered an argument that the insurers had no effective control over the litigation.
  1. However it came about, the net effect of the HOTS was to give to the partners the power to control the defences to the Jewel of the Sea claims with minimal influence from AIG (or influence that, for whatever reason, AIG was not prepared to exercise) despite AIG being committed to bankroll the pursuit of those defences when there must have been entirely reasonable concerns from time to time, if not throughout, that the game was not worth the candle. Ms Shuttleworth more or less accepts that (see paragraph 69 above).
  2. The question that arises in the particular circumstances of this case is whether I should be persuaded that since, as a matter of fact, the Giambrone Partners effectively controlled the defence to the litigation, AIG is thus protected from a successful section 51 application. I do not think so: it would involve shutting one’s eyes to the circumstances in which the ceding of this power came about. As I have said, the power was conceded on a basis that left AIG either with virtually no effective control or with control that AIG decided, for whatever reason, not to exercise. As it happens, large sums of money were expended on the litigation which, given what AIG must have known by the time of the HOTS about Avvocato Giambrone and the tenacity with which he would seek to protect his interests, was foreseeable (a tenacity that is further evidenced by a great deal of material that has been revealed in the context of this application). Whilst the “deal” reflected in the HOTS may have been commercially sensible as between AIG and Avvocato Giambrone, it cannot operate to exclude the protection from adverse costs consequences afforded to the Claimants by section 51. The fact that the Claimants commenced and maintained their claims knowing the terms of the HOTS does not, in my view, alter that position. The obverse position is that AIG took its chances that the HOTS would not have the impact on any section 51 application made in due course that it contended it would, the threat to make such an application having been made on behalf of the Claimants at an early stage.
  3. In my view, where an indemnity insurer substantially relinquishes control of the conduct of the litigation to the insured (or fails to take steps to control it when there are grounds for intervening), and does so in the expectation that it will be immune from a costs liability towards the opposing party if the opposing party is successful, that expectation is open to be falsified by the court in a section 51 application, particularly if the prospects of success for the insured are assessed as poor.
  4. I would see that as the essential basis for making an order in this case and as a stand-alone factor that opens up the broad discretion conferred by section 51. To the extent that any broad support is required from previous authorities, then the reciprocity/asymmetry issue referred to in the Travelers Insurance case (see paragraphs 15-20 above) offers some support, albeit that the facts were rather different in that case, as does TGA Chapman Ltd v Christopher [1998] 1 WLR 12.
  5. I would add that, in my judgment, Mr Majumdar was right to say that the arrangement reflected in the HOTS was one which benefited AIG because, certainly vis-á-vis the Giambrone partners, the aggregation issue became settled at a time when there were doubts about whether AIG’s interpretation of the policy provisions and the MTC was correct. As he says, the “consequence of a successful defence would have been that AIG’s alleged right to aggregate would not need to be tested.” This means that permitting the defence costs to be underwritten in the way for which the HOTS provided did benefit AIG. I accept, of course, that the arrangement (and thus the payment of the defence costs) was not for AIG’s sole benefit, but that it obtained some material benefit from the arrangement is a cumulative factor that adds weight to the making of an order under section 51. Whether the case of Woodman (see paragraph 44 above) now makes any difference to the position on aggregation is not relevant for that purpose.
  6. In the context of the HOTS, I should record that Ms Mulcahy asserts that the Claimants will be bound by the HOTS because they stand in the shoes of the insured for the purposes of the Third Party (Rights Against Insurers) Act 1930. I should make it clear that I have not heard argument on that issue and to the extent that it is an issue, it is for another day.
  7. In responding to the section 51 application, Ms Mulcahy has also placed very considerable reliance upon the efforts made by AIG (through instructions given to RPC) to settle the underlying litigation. Whilst she tells me (and I accept without attributing responsibility for it) that I may not have seen everything because of legal professional privilege issues, I have seen enough to accept that AIG did make repeated efforts to bring the litigation to an end through settlement. She criticizes the Claimants for their attitude to the negotiations, suggesting, for example, that “they set their faces against engaging properly in settlement discussions with AIG”, “ignored the reality that there was not enough insurance money to compensate all who suffered losses as a result of the defaults of the Giambrone entities” and “inexplicably” declined to agree to arbitrate the aggregation dispute following a proposal to that effect in July 2013.
  8. I am afraid submissions of this nature can hardly ever take matters further in this context. The exercise invited by them is very different from the familiar exercise of determining whether a particular offer has been bettered or not bettered by the result of a contested trial. The offers will have been made from AIG’s viewpoint at the time they were made. It is quite clear that the responses on the part of the Claimants will have been conditioned by their viewpoint at the time of the responses. The “without prejudice” and “without prejudice save as to costs” material simply reveals what was said on both sides. The ability of the court now to assess the validity or reasonableness of the competing positions taken then and to say that one was right and the other wrong is extremely difficult, if not impossible. I accept that AIG would wish to have settled all the claims rather than to meet the costs of seeking to defend them. Doubtless the Claimants would have been of an analogous mind in relation to the pursuit of the claims, but there were obstacles on both sides and I consider it quite impossible to attribute responsibility for the failure of the negotiations in a way that has any impact on the outcome of this application.
  9. It follows that, for the reasons I have given, in principle the Claimants have established their entitlement to some award under section 51. I say “in principle” and use the expression “some award” to reflect the proposition that there is one other factor to be considered, namely causation and, following from that if established, quantification.
    1. It is quite impossible to perform the task of deciding what proportion of the costs incurred by the Claimants would not have been incurred but for the support for the defence given by AIG other than on a broad impressionistic basis from the vantage point of being the judge who presided over the trial. Avvocato Giambrone had a more or less free hand in dictating the tactics of the trial and I have little doubt that he did just that. Ms Shuttleworth says that “AIG certainly did not adopt or pursue a strategy of delay or a policy of making life difficult for the Claimants.” I am, of course, prepared to accept that no conscious decision to that effect was taken by AIG, but the issue is to a large extent determined by an objective appraisal of what in fact happened. As I observed in both judgments and the Final Ruling on Costs, every possible point was taken on behalf of the Defendants and such concessions as were made were made very late and made only when the position being maintained hitherto was plainly untenable. The objective observer, which I was for this purpose, could readily conclude that this was a war of attrition, but one which would probably have been substantially avoided if AIG’s funding had not been provided and AIG had exercised proper control over the expenditure.
    2. I have little option but to conclude this judgment with the time-honoured expression “doing the best I can”, but on that basis I consider that the Claimants will have spent twice as much on pursuing their claims than they would have done if AIG had not funded the defence of the claims in the way it did after the HOTS were concluded. That may be being somewhat generous to AIG, but I have elected to err on the side of caution. AIG has accepted that it controlled the defence of the claims against the LLP until it ceased funding those claims and, unless I have overlooked some nuanced argument in relation to that aspect, I do not see why the order to be made under section 51 should not be the same for the whole period during which AIG was funding the defence of the claims brought by the Claimants in this action during the time they were represented by PM and EC. In other words, although AIG ceased funding the defence of the claims against the LLP prior to the trial, the order should be one that provides that AIG should pay one half of all of their costs, not merely up until AIG stopped funding the defence costs of the LLP.
Conclusion
  1. I will invite Counsel to agree a form of order giving effect to this decision, but I apprehend that it will be an order that requires AIG to pay one-half of the costs of the Claimants, to be assessed on the standard basis if not agreed.