Greenclean Waste Management Ltd -v- Leahy (Maurice Leahy & Co Solicitors)

Factual and Procedural Background

The plaintiff, a company, initiated a professional negligence claim against its former solicitors concerning advice given in relation to the lease of certain industrial premises between 2001 and 2002. The plaintiff alleged that the defendants failed to advise it properly about its repairing obligations under the lease, resulting in significant refurbishment costs due to poor condition of the premises at lease end. In 2006, the lessor sued the plaintiff for breach of covenant, which was settled for €310,000 plus approximately €150,000 in costs. The plaintiff further contended that the defendants committed additional breaches, including failing to advise on limitation periods and not disclosing a material conflict of interest involving a former principal of the defendants' firm.

The plaintiff entered voluntary liquidation in December 2011 and is currently insolvent. The defendants applied for security for costs under Order 29 of the Rules of the Superior Courts 1986 and section 390 of the Companies Act 1963. The plaintiff holds an After the Event (ATE) insurance policy, which is central to the court’s consideration of whether to order security for costs.

Legal Issues Presented

1. Whether the plaintiff’s ATE insurance policy is a relevant factor in determining whether to order security for costs under Order 29 of the Rules of the Superior Courts 1986 or section 390 of the Companies Act 1963.
2. How the court should interpret the phrase “reason to believe” in section 390 regarding the company’s ability to pay the defendant’s costs.
3. Whether the terms and conditions of the plaintiff’s ATE insurance policy provide sufficient security to negate the defendants’ entitlement to security for costs.

Arguments of the Parties

Defendant's Arguments

• The defendant argued that the plaintiff’s insolvency prima facie entitled them to security for costs.
• They contended that the plaintiff’s ATE insurance policy contained broad avoidance provisions, particularly a “prospects clause,” allowing the insurer to terminate coverage if it is more likely than not that the plaintiff will lose the claim.
• Due to these provisions, the defendant submitted that the ATE insurance did not provide reliable or sufficient security for costs.

Plaintiff's Position

• The plaintiff relied on the existence of the ATE insurance policy as a factor mitigating the risk that it would be unable to pay the defendant’s costs.
• The plaintiff’s insurers had not yet provided a binding assurance regarding the non-exercise of the right to repudiate under the prospects clause.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Jirehouse Capital v. Beller [2008] EWCA Civ 908, [2009] 1 WLR 751	Interpretation of “reason to believe” in the context of security for costs under Civil Procedure Rules (England and Wales)	Used to support the view that “reason to believe” requires weighty and objectively reasonable grounds but not proof on the balance of probabilities.
Michael Phillips Architects Ltd. v. Rilkin [2010] EWHC 834, [2010] Lloyd’s Rep. IR 479	Assessment of the adequacy of ATE insurance as security for costs	Provided a detailed analysis of the limitations and risks in relying on ATE insurance, emphasizing the insurer’s rights to avoid or cancel coverage and the consequent insecurity for defendants.

Court's Reasoning and Analysis

The court began by explaining the statutory framework under section 390 of the Companies Act 1963, emphasizing that an order for security for costs requires credible testimony and weighty, objectively reasonable grounds to believe the company will be unable to pay costs. The threshold is higher than mere possibility but does not require a balance of probabilities standard.

The plaintiff’s insolvency established a prima facie case for security for costs. However, the existence of ATE insurance generally would be a relevant mitigating factor. The court examined the terms of the plaintiff’s ATE policy, noting its linkage to a no win no fee agreement and the insurer’s right to terminate coverage if it is more likely than not that the plaintiff will lose the claim (“prospects clause”).

The court observed that unlike standard insurance, ATE policies contain broad repudiation rights and conditions that make it difficult to objectively assess the risk that the insurer will not pay costs. The insurer’s right to cancel coverage based on legal advice about prospects of success, which are privileged and not subject to court inquiry, adds significant uncertainty.

Drawing on the analysis in Michael Phillips Architects Ltd. v. Rilkin, the court acknowledged that while ATE insurance can in principle provide some security for costs, the particular provisions of such policies often undermine their reliability as security. The court found the plaintiff’s policy’s repudiation clause problematic for assessing whether it provided adequate security.

Given these novel and complex issues, the court decided to adjourn the security for costs application to allow the plaintiff, its legal advisers, and insurers to consider the litigation prospects and for the insurer to provide a binding assurance that it will not exercise the right to repudiate coverage based on the prospects clause.

Holding and Implications

The court’s final decision was to adjourn the application for security for costs for a period not exceeding three months. The plaintiff’s insurers were to provide a binding assurance that they would not exercise the right to repudiate coverage under the prospects clause.

If such an assurance is given, the court will not order security for costs. However, if no such assurance is forthcoming, the court will find that there is reason to believe the plaintiff will be unable to discharge a costs award and will order security for costs accordingly.

This decision directly affects the parties by suspending the security for costs order pending further assurance from the insurer. The court did not set new precedent but carefully navigated the challenges posed by the novel nature of ATE insurance in the security for costs context.