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CONFIDENTIAL AND LEGALLY PRIVILEGED
POST OFFICE GROUP LITIGATION WOMBLE
Steering Group Meeting: 1 February 2018 DICKINSON
DECISION: Should Post Office make an application for Security for Costs?
1. THIS PAPER
On 17 November 2017, the PLSG supported the making of a Security for Costs application. This was
conditional on there being one last attempt to resolve the need for security through agreement with Freeths
and Therium. Those efforts have now been exhausted and we are seeking approval from the PLSG to issue
an application for Security for Costs at Court.
2. BACKGROUND
Normally in civil litigation the costs of the successful party are paid by the losing party. If Post Office is
successful in defending the Group Action, there is a fair chance that the Claimants would be liable to pay (at
least some of) Post Office's legal costs. Similarly, if the Claimants are successful, Post Office will likely need
to pay a proportion of the Claimants’ legal costs.
The Claimants in the Group Action are largely individual postmasters. They do not have the funds to finance
this litigation and are therefore unlikely to have the money to pay Post Office's costs.
The Claimants have litigation funding from Therium Litigation Funding IC (Therium). Therium is funding the
Claimants’ own legal costs in return for a slice of any compensation that is awarded to the Claimants. As a
general rule, if a third party funds a Claimant to bring a claim, the Court is usually prepared to make that third
party liable for the Defendant's costs as if the third party funder was a Claimant. In effect, there is a strong
prospect that Therium will be ordered to pay Post Office's costs if Post Office successfully defends this
litigation.
The Claimants also have the benefit of adverse costs protection insurance, commonly known as "After the
Event" insurance (ATE insurance). The ATE insurance is designed to pay Post Office's legal costs, if the
Claimants are ordered to pay them by the Court. In effect, the ATE insurance protects both the Claimants
and Therium against Post Office's costs.
Normally, the above financial measures would be sufficient to give Post Office comfort that there was
someone who would have deep enough pockets to pay Post Office's costs (namely either Therium or the
ATE insurers). However, we have identified two potentially critical weaknesses in this protection.
First, the Therium Group is a reputable and well-capitalised litigation funder. However, the funding entity in
these proceedings is not the main Therium parent company, but an offshore subsidiary based in Jersey. As
an offshore company there are few public records on its financial position. We are therefore unable to
determine whether Therium (Jersey) would have sufficient funds (or an adequate line of funding from its
parent) to meet a costs order and Therium has refused to provide us with this information. There is therefore
a risk that Therium (Jersey) is thinly capitalised and could be collapsed rather than pay out on a costs order.
Second, on reviewing the ATE insurance there are a number of provisions that could mean that the Insurers
could avoid cover:
« Whilst Freeths have confirmed that the limit of cover is "well in excess of £1 million", it has to date
refused to provide an actual figure. It is clear that Post Office's costs will be higher than £1 million
as they estimated to be up to £9.5m by the conclusion of the Common Issues trial.
e There are a number of provisions that allow the insurer to cancel the policy. There are also certain
types of legal costs that are not covered by the policy (although these are few). Freeths have
informally agreed to notify Post Office should the ATE insurance be cancelled or become
unenforceable in whole or in part. We have asked for this to be formalised into an enforceable
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solicitor's undertaking but Freeths have refused to do this. This creates a risk that the policy could
be withdrawn without Post Office's knowledge.
e The ATE insurance contains clauses permitting the insurers to avoid cover where:
othe legal action is abandoned, discontinued, settled or lost at trial as a result of the
dishonesty of the Insured or the Claimants' committee; and/or
othe Insured has made fraudulent or false representations to the Insurers.
Given that a number of the Claimants have been convicted of false accounting (a dishonesty offence) and
we believe that many others may have committed false accounting even if not criminally prosecuted for it,
there is a material risk that the above provisions may be engaged. Freeths agreed to amend the ATE
insurance to address this but the amendment makes no sense and offers no extra protection.
If the above risks were to manifest, then the ATE insurance might be withdrawn and Therium may collapse,
leaving Post Office with no one to recover its costs from.
Where a Defendant, such as Post Office, is concerned that it does not have a real prospect of recovering its
costs, even if it is successful, it may seek an order for "security for costs" from the Court. Such an order can
be obtained against a funder (i.e. Therium) rather than the Claimants themselves. The order will likely
require Therium to put up security, typically in the form a guarantee from a reputable person or by way of
placing cash in an escrow account or the Court's account.
WBD has been working with Freeths for the last 18 months to try to address the above concerns and thus
avoid the need for a security application. We have tried to have the ATE insurance re-drafted to avoid the
dishonesty exemptions but Freeths are now refusing to make any further amendments. We have also asked
Freeths and Therium to provide financial information about Therium to address the concerns about
Therium's solvency. They have refused to do this.
This has been frustrating because the above matters appear easy to solve. Therium is a reputable funder
and should be able to provide the financial information needed about its subsidiary. Likewise, the insurance
is provided by reputable insurers, who would might be prepared to flex their policies to address these risks.
The fact that Freeths have dragged this out for months and are refusing to take these simple steps causes
us concern, and potentially indicates that there is a fundamental problem somewhere in their cost protection
scheme that is not currently visible to us.
3. MERITS OF AN APPLICATION FOR SECURITY
In light of the above, we have engaged a specialist barrister, Jamie Carpenter, who advises on issues with
legal costs. We have also held a Conference with Counsel that was attended by Jamie, our primary
Counsel, David Cavender QC, WBD, Rodric and Mark. In summary, the advice from Counsel is that:
e The application for security should be made. There are no other steps that Post Office needs to take
before making the application.
e As things currently stand, Post Office has a better than evens chance of getting security if an
application were made.
e However, we would expect Therium to disclose the financial information that it is currently
withholding once the application is made. This information will likely prove that Therium is of good
standing and that will defeat the security application. At that point, Post Office would need to
withdraw the application.
e Wewill then have an argument about who should pay the legal costs incurred in dealing with the
withdrawn security application. Counsel believe that there is a good chance that the Claimants (ie.
Therium) will be ordered to pay Post Office's costs because it has refused to disclose financial
information to date.
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e — If Post Office's application proceeded to a full hearing and was allowed by the Court, the Claimants /
Therium will likely be ordered to pay Post Office's costs of the application.
e If Post Office's application proceeded to a full hearing and was dismissed by the Court, Post Office
would likely be ordered to pay the Claimants’ and / or Therium's costs.
e Post Office needs to make a decision on this application now. Delaying an application for security
weakens its prospects of success and we have already spent 18 months trying to resolve this issue
amicably with Freeths.
The costs of making a security application are as follows:
« Post Office's costs will be around £40k.
e Therium will engage their own lawyers and we would anticipate their costs to be around £80k.
e — Itis currently unclear whether Freeths will appear at the application. If they do, we anticipate that
their costs may be around £80k.
4. OTHER POINTS TO NOTE
First, a party rarely recovers 100% of their costs from the other side. Under the Court rules on how costs are
assessed, a party usually recovers around 60-70% of their incurred costs. We will therefore be telling the
Court that Post Office's costs are estimated at £9.5m, but we will only be seeking security for the recoverable
element, being around £6m.
Second, we will be placing on the public Court record a statement that Post Office's costs could be up to
£9.5m. This may get picked up by the media and reported on.
Third, if security is ordered, this will come at a cost to Therium who may need to raise funds and pay interest
on them. In recent correspondence, Therium have asked that Post Office gives a cross-undertaking for
those financing costs. This is essentially an indemnity from Post Office to Therium against these financing
costs in the event that Post Office loses the litigation and therefore never needs to call on the security. We
will attempt to object to this but it is becoming increasingly for the Court to require cross-undertaking when
ordering security.
5. RECOMMENDATION
In essence, Post Office is being asked whether it wishes to take a slightly better than 50/50 chance on Court
application to guarantee that its future costs of £6m are adequately secured, with the risk that if unsuccessful
it may need to pay out around £160k in legal costs to the Claimants and Therium.
Given the amount of costs at stake, our recommendation is that Post Office should make the security
application, even though there is a chance that it might fail.
If Post Office does not make the application now, it should be prepared to proceed through this litigation
without any security.
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