After-the-event insurance premium not recoverable legal expenses, Supreme Court rules

A panel of three justices unanimously held that David McGraddie, who successfully appealed against a decision of the Inner House of the Court of Session in a dispute with his son Rodger McGraddie, was unable to recover a £40,000 ATE premium from the Scottish Legal Aid Board (SLAB).

President of the court Lord Neuberger – with whom Lady Hale and Lord Reed agreed – ruled that a successful party to litigation cannot recover an ATE premium as part of his costs or expenses, however reasonable it was to have incurred it.

The costs case related to a Supreme Court judgment given in July 2013 in an appeal concerning a dispute between the father, the pursuer, and his son, the first defender, over the ownership of a house.

The court heard that the Mr McGraddie senior had given his son a cheque for £285,000, which Mr McGraddie junior and his wife used to purchase a house in their own names, but MrMcGraddie senior began proceedings seeking the conveyance of the house to him on the ground that the £285,000 had been paid to his son to buy a property for his parents.

The Lord Ordinary rejected the defenders’ case that the £285,000 was a gift and granted the pursuer substantially the relief which he sought, but the defenders’ appeal was allowed by the Extra Division. However, the pursuer successfully appealed to the Supreme Court, which reinstated the Lord Ordinary’s decision.

The court heard that the pursuer had taken out ATE insurance against his potential liability for the defenders’ costs if he were to lose his appeal to the Supreme Court and was subsequently ordered to pay the other parties’ costs.

The pursuer contended that the £40,000 ATE premium should be recoverable from SLAB as part of his expenses, but the defender argued it should not be.

The Supreme Court awarded the pursuer his expenses of the appeal to the Inner House and to the Supreme Court against the legal aid board, but directed that those expenses should not include the ATE premium of £40,000 paid by the pursuer.

The relevant provisions of the Supreme Court Rules and Practice Direction 13, and the Rules of the Court of Session, allow expenses which are “reasonably incurred”.

“If the ATE premium can properly be regarded as part of the pursuer’s expenses, then it seems to me clear that it was a liability which was ‘reasonably incurred’ and cannot be said to fall foul of rule 42.10 of the Rules of the Court of Session,” Lord Neuberger observed.

However, the problem, according to the board, was that an ATE premium was “not properly an item of expenses” which was recoverable from the other party, and the judges considered that there was “obvious force” in this argument.

“In the absence of any express provision permitting it, one would not expect an ATE premium, taken out to protect the person who turns out to be the successful party against liability for costs in case he loses, to be recoverable from the unsuccessful party. It is simply not part of the costs of the appeal, as a matter of ordinary language,” Lord Neuberger said.

He continued: “Further, it seems unlikely that, in the absence of an express provision so stating, the rules would have envisaged that a losing party’s liability for a substantial sum should depend on the successful party’s appetite for, and financial ability to take, the risk of losing and paying costs.”

Giving the judgment of the court, Lord Neuberger said: “Thus, turning to the language of the Scottish Rules of Court, it is hard to say that the ATE premium was a sum incurred ‘for conducting the cause’ within rule 42.10. It was a sum incurred by the pursuer to enable or assist him to conduct the cause, to protect him against any potential liability for expenses as a result of conducting the cause, but it was not, as a matter of ordinary language, a sum incurred ‘for conducting the cause’.”

This position was confirmed by both English and Scottish authority.

The president added: “In my view, therefore, (i) as a matter of principle, (ii) in the light of the terms of the relevant court rules, and (iii) on the basis of consistent judicial authority on both sides of the border, the law is clear. In the absence of agreement or a specific statutory sanction (either expressly or through valid delegated legislation) to the contrary, a successful party to litigation cannot recover an ATE premium, however reasonable it was to have incurred it, as part of his costs or expenses of legal proceedings.”