RBS Loses Security for Costs Application in the On Going Wall v RBS Litigation

Simon Arnold has experience of banking and finance disputes, in particular a number of claims concerning the alleged mis-selling of complex foreign exchange derivatives and interest rate swaps.

On 7 July 2017 Mr Justice Knowles, sitting in the Commercial Court refused RBS’s application for security for costs in the sum of £17.68 million (VAT exclusive) against Litfun Limited, Mr Wall’s third party funder.

Litfun was represented by Michael McLaren Q.C. of Fountain Court Chambers and Simon Arnold of Park Square Chambers, Leeds, instructed by Janine Alexander partner in Collyer Bristow solicitors, London.

This was a security for costs application made by RBS against Litfun Limited a commercial third-party funder which provides litigation funding to Mr Wall in his ongoing claim against RBS in which he claims damages of around £700m.

RBS argued that Mr Wall’s after the event (“ATE”) insurance, the first layer of which was provided by QBE in the sum of £2m and would be supported by a deed of indemnity if certain conditions were met; the second layer provided by DAS in the sum of £2m and in respect of which an anti-avoidance endorsement (“AAE) had been added; and the third layer of cover – £3m – provided by ERGO  with an AAE included from inception was insufficient security for its incurred and anticipated costs to trial of £17.69 million (exclusive of VAT) both in principle and amount.

Principle: RBS contended that the QBE deed of indemnity (“DOI”) was inadequate because it was ‘linked’ to the underlying ATE policy (in the sense that the DOI in the recitals, confirmed that the deed of indemnity was issued “in connection with” the ATE policy) and this may, in RBS’s view affect the operation of the DOI.

As to the ATE policies, RBS argued that those were not good security because notwithstanding the AAE, ATE insurers could still nonetheless avoid the policies and could raise other coverage defences to deny indemnity under the ATE policies.  RBS also argued that in the event of Mr Wall’s bankruptcy any payments under the ATE policies would fall into the bankrupt estate for distribution by the trustee in bankruptcy to Mr Wall’s creditors.

RBS further argued that the test in a security for costs application against a funder as opposed to a claimant should be set higher because a commercial litigation funder has funded the litigation in return for a share in the proceeds and, in such a circumstance, it was argued that RBS should take absolutely no risk that the ATE polices may not respond.

Amount: RBS had voluntarily (because the case fell outside the costs budgeting regime) produced a Form H in which it claimed its incurred and estimated costs to trial would be at least £17.69 million exclusive of VAT.  RBS sought security in that full amount and argued that indemnity cost security should be provided as it anticipated, in the event that it prevailed at trial, securing an indemnity cost award against Mr Wall.   Further RBS claimed that the litigation funder would not suffer any prejudice by providing security and if Litfun was correct that the ATE polices would respond, then it would be no worse off.

Litfun’s case:  ATE policies with AAE and a DOI do provide good security for a defendant’s prospective costs and it matters not whether those ATE and DOI products are provided as security by a funder as opposed to a claimant.  There is a line of authorities which have held that ATE policies (Geophysical[1], Premier Motors[2] etc) do provide sufficient security when there is no more than a theoretical or fanciful risk that those policies may be avoided.

Litfun argued that as the ATE polices were endorsed with an AAE there was no chance that the ATE polices would not respond and served evidence from the relevant ATE underwriters to confirm the position.  Litfun argued that as a matter of principle and logic the existing line of authorities were equally applicable to funders and the court should not impose a higher test.

As to the QBE deed of indemnity Litfun made plain that the DOI had to reference the underlying policy to ensure that QBE was not exposed to a ‘double jeopardy ‘of being forced to make a payment under both the policy and the DOI. Further, the court had already held in Verslot[3] that a DOI from QBE was good security.

As to any risk that in the event of Mr Wall’s bankruptcy the policy proceeds would fall into the general insolvent estate, Litfun made two points (i) the Third Party (Rights Against Insurers) Act 2010 would operate to transfer Mr Walls’ rights under the ATE policies to RBS on the event of his bankruptcy and (ii) even if that was wrong, a Quistclose[4]  trust would arise on the facts if this case which would ring fence the ATE proceeds and this would be respected by any trustee in bankruptcy.

In terms of quantum, Litfun said that the starting point for considering a security for costs application was that the prospective costs should be assessed on a standard basis, following the Court of Appeal’s decision in Excalibur[5].  Litfun also said that the costs claimed by RBS were unreasonable and likely to be subject to a very significant reduction should they be assessed.  Litfun undertook a detailed analysis of the claimed costs in its skeleton argument and argued that the likely recoverable costs following trial would not exceed £10m.

Litfun further contended that the principles in Arkin[6] applied such that any security which Litfun may be ordered to provide should not exceed its Arkin cap, being the amount of money which it had paid to fund Mr Wall’s claim.  Litfun provided evidence that its actual Arkin cap being the sums it had spent to 4 July 2017 was circa £7.1m and the contractual commitment under the litigation funding agreement was £9m.

Mr Justice Knowles adopted a pragmatic response.  He declined to order any security for costs in RBS’s favour.  Instead the Judge agreed that a funding package of £13 million which had been offered to RBS on an open basis on the day of hearing by Litfun through its solicitors, Collyer Bristow, was sufficient protect RBS.

That proposed funding arrangement comprised the existing £7m of ATE cover (together with a deed of indemnity from QBE) plus further ATE cover (with AAE) from DAS and ERGO in a combined total of £3m with an additional £3m to be provided by another ATE insurer by 1 September 2017 (alternatively Litfun would procure a bank guarantee from Barclays Bank plc in the sum of £3m).

Comment: this decision will be welcomed by ATE insurers and the litigation funding market generally.  The possibility that ATE insurance (especially when enhanced with AAEs or supported by a DOI ) would not be considered adequate security for a litigation funder’s costs would potentially have had a chilling effect on both the litigation funding and ATE markets, creating uncertainty for ATE insurers, potential claimants and those already pursuing claims supported by ATE policies.

Mr Justice Knowle’s pragmatic approach recognised the commercial utility of ATE products and the important role they play in supporting the litigation funding market. The Judge clearly was not impressed by RBS wide ranging criticisms of these particular ATE (with AAE) policies as his validation of the funding package offered by Litfun to RBS made clear.

The application of the Arkin cap principles to litigation funders was not resolved in this case (because of the Judge’s approach it was not necessary to do so) and such issues may well raise their head in the future.

[1] Geophysical Service Centre Co. v Dowell Schlumberger (Me) [2013] EWHC 147

[2] Premier Motorauctions Ltd v. PricewaterhouseCooper LLP [2016] EWHC 2610 (Ch)

[3] Verslot Dredging BV v HDI Gerling [2013] EWHC 685 (Comm)

[4] Quistclose Investments Ltd v Rolls Razor Ltd  [1970] AC 567

[5] Excalibur Ventures v. Texas Keystone [2016] EWCA Civ 1144

[6] Arkin v. Borchard Lines [2005] 1. W.L.R. 3055

Before being called to the Bar, Simon Arnold was a solicitor and partner at DAC Beachcroft for a number of years specialising in claims concerning construction professionals. In addition to his significant construction dispute experience which spans over 18 years, Simon has a number of years experience advising insurers on coverage issues and conducting litigation involving coverage disputes.

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