Supreme Court rules that After the Event insurance premium not a recoverable expense

One of the questions in the mind of every commercial client engaged in litigation will be what might this litigation cost me? If I win, what sums will not be recoverable? If I lose, what will I have to pay? The principal remedy sought - often a large sum of money - is a very important part of any litigation but every client should be informed about what the litigation may cost them: win or lose. In the ordinary course, a commercial client funds its own litigation. However, funding can come from other sources. This article focusses on a recent decision of the Supreme Court regarding the recoverability by a pursuer of an After the Event insurance premium (ATE premium) in the course of his litigation, by way of judicial expenses (known as costs in England & Wales).

The Supreme Court has issued a second judgement in the case of McGraddie v. McGraddie & another [2015] UKSC 1. The facts are relatively straight-forward. The pursuer, Mr Graddie, gave money to his son and his partner, together the defenders to the action. The defenders spent some of the money on cars, the repayment of debts and furnishings; and with the rest they bought a property. The pursuer claimed he gave the money to the defenders to buy a property for him. The defenders claimed the money was a gift, and that the purchased property belonged to them. Following a hearing on the evidence, the pursuer succeeded. The defenders succeeded in their appeal. The pursuer took his case to the Supreme Court who overturned the appeal and reinstated the original decision: the pursuer won.

The first judgement is recommended to students and practitioners of Scots law for the discussion of the basis upon which an appellate court can interfere with a decision of a judge who heard the evidence in the case; and for Lord Reed’s postscript regarding whether the appeal had properly been certified as reasonable, see [2013] UKSC 58.

The second judgement will be of more interest to commercial clients as it deals with the expenses of litigation. While the defenders had been granted civil legal aid to appeal their case and to resist the appeal of that decision before the Supreme Court, the pursuer required to fund the proceedings himself. If unsuccessful, the pursuer would be exposed to a potentially large adverse award of expenses.

The pursuer took out ATE insurance against his potential liability for the defenders’ expenses if he lost and was ordered to pay the defenders’ expenses. The pursuer paid a premium of £40,000 which protected the pursuer up to a maximum liability of £100,000. Following his success, the pursuer sought an award of expenses, such award to include the £40,000 premium as part of his expenses. The Scottish Legal Aid Board contended that the ATE insurance premium was non recoverable as a matter of law.

Expenses are governed by the particular rules of the court hearing the litigation. Having considered the applicable rules - sections from the Legal Aid (Scotland) Act 1986, the Supreme Court Rules and the Rules of the Court of Session – Lord Neuberger, the current President of the Supreme Court, who delivered the judgement, had no difficulty in granting an award of expenses in the pursuer’s favour. However, he was not persuaded that an ATE premium was a cost of the appeal, to use the language of the Supreme Court Rule. While it was plainly closely linked to the appeal itself, at least from the pursuer’s perspective, it was extraneous to the costs of the appeal, as a matter of ordinary language. The Supreme Court found that this conclusion is confirmed by the position as it appears to be in the courts of Scotland and in England & Wales.

In Scotland, a 2003 decision by Lord Carloway in the case of McNair’s Executrix v. Wrights insulation Co Ltd, held that an ATE premium could not fall within the particular rule governing expenses in the Court of Session as “what is reasonably undertaken to conduct a cause cannot normally vary according to the economic circumstances or needs of the litigant”. Lord Carloway assessed the taking out of ATE insurance as “an extrajudicial step adopted, no doubt quite reasonably and legitimately..., to protect the economic interests of the client” but that an ATE premium was not a recoverably expense of the action.

Throughout his judgement, Lord Neuberger makes frequent reference to not being able to rely on specific statutory sanction to arrive at a different conclusion to that he regrettable felt he had to reach. One may see this as an open invitation to the various Rule making bodies to reflect on whether, in particular circumstances, it would be just to allow a pursuer to recover an ATE premium.

Euan McSherry is a Litigator, a Solicitor Advocate and Head of DWF’s Real Estate Litigation in Scotland.

This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.

Euan McSherry

Partner - Head of Real Estate Litigation (Scotland)

I provide litigation advice to clients in the retail, food and banking sectors. I am the first Scottish lawyer to be listed on the Register of RICS Accredited Mediators.