The Owners of the ship Ariela (“Ariela”) incurred costs of more than $1.25m (exclusive of interest) in defending a claim by an entity known as Kamal (the Owners and/or Demise Charterers of the dredger “Kamal XXVI” and the barge “Kamal XXIV”). There were two actions (now consolidated) between Ariela and Kamal in which I gave judgments ([2009] EWHC 177 (Comm) and [2009] EWHC 3256 (Comm)). I concluded that Kamal’s claim was a fraudulent claim from the outset, and resulted from fraudulent statements by Kamal as to the extent of the claim and the loss, and fraudulent concealment by Kamal of the true nature of the claim (paragraphs 21, 22 and 30 of the latter judgment). Despite orders by this Court, including interim payment orders, Kamal has failed to pay any sum to Ariela, nor complied with my order to repay to Ariela £65,000 paid on account of costs to Kamal by Ariela on 14 November 2007.

The Respondents to this application are the Underwriters, on the basis that they supported and funded Kamal’s action and instructed the solicitors who acted in the first action (Ince & Co) in pursuing recovery against Ariela both of the insured claim, which the Underwriters paid out to Kamal in the sum of US$631,422.97 in 2005-2006, and to which they were subrogated, and in respect of Kamal’s uninsured losses. Ariela seek an order, pursuant to s51(3) of Senior Courts Act 1981, that the Underwriters pay the costs incurred by them (and not recovered from Kamal as above) in the two sets of proceedings. Such application has been referred to me as the trial judge, pursuant to the practice established in Symphony Group plc v Hodgson [1994] QB 179 at 193. It is common ground that the discretionary jurisdiction to make such an order, first articulated by the courts in Aiden Shipping Co Ltd v Interbulk Ltd [1986] AC 965, is only exercised if it is just and equitable to do so.

The instant application by Ariela is for disclosure by the Underwriters, as Respondents, of documents or categories of documents set out in a Schedule to an Application Notice dated 25 September 2010. In the event, there has been a degree of agreement in respect of the contents of that Schedule: as to Category 1 (documents referred to in the Underwriters’ Defence), items 1 – 6 are agreed, as is the generic item 8, insofar as it relates to items 1 – 6: in Category 2 (documents pre-dating the Underwriters’ instruction of Ince & Co (i.e. before 26 January 2006)), items 9(i) and (l) are agreed: in Category 3 (documents post-dating the Underwriters’ instruction of Ince & Co (i.e. after 26 January 2006)), items 12 – 14 are not opposed, insofar as there are any documents concerning the Underwriters’ agreement to retain Ince & Co, and the basis upon which they would pay Ince & Co’s fees: and in respect of Category 4 (payment), item 20(a) is no longer in issue, and with regard to the balance of items 20 and 21, the only issue relates to the Underwriters’ claim of privilege, such that there is agreement by them to disclose documents falling within those items, but suitably redacted, in particular to remove any narratives on invoices or receipts.

It was common ground that there is a place for the making of interlocutory orders, such as orders for disclosure of documents, in relation to a s51 application. Both parties referred to the helpful approach of Laddie J in Robertson Research International Ltd v ABG Exploration BV and others (13 October 1999 QBD) as endorsed by Morgan J in PR Records Ltd v Vinyl 2000 Ltd and others [2007] EWHC 1721 (Ch) [2008] 1 Costs LR 19, and of Blake J in Thomson v Berkhamsted Collegiate School and others [2009] EWHC 2374 (QB) [2009] 6 Costs LR 859. Laddie J, in Robertson, distinguished (at paragraphs 36, 37 and 41) the earlier decision of Lightman J in Bristol & West plc v Bhadresa [1999] 1 Lloyd’s Rep IR 138 by reference to Lightman J’s conclusion that there was not in Bristol & West a sufficiently good arguable case to allow the s51 claim to proceed at all. With regard to proceedings in which, as in this case, the application is to proceed to resolution at a trial, Laddie J concluded, in paragraph 40, that what was required is “that the court should exercise its considerable administrative powers to ensure that the application should be dealt with as speedily and inexpensively as possible, consistent with fairness to both sides”. Blake J, in Thomson, at paragraphs 14 to 16 of his judgment, where he referred (at paragraph 15), to Morgan J’s judgment in PR Records and to a judgment of mine in Greco Air Inc v John Tilling and others [2009] EWHC 115 (QB) concluded that “it is … plain from those cases that the court has power to exercise disclosure orders in order to facilitate in an economical fashion a fair hearing of the application, although disclosure is often made without formal order”, and continues (in paragraph 16) “If the court decides that it is necessary and in the interests of justice to make a disclosure order, it may proceed to give a detailed order within its general powers under the CPR to remove outstanding issues that may be the source of delay and further expense if unaddressed. Such an order may include inspection of documents by the court where there is a clear issue as to whether privilege attaches to them”.

At the invitation of both sides, I have borne in mind on this application for disclosure that the s51 application should be dealt with “as speedily and as inexpensively as possible, consistent with fairness to both sides”. I have also considered the issues which are live in this application and to which of course alone disclosure should relate. I am satisfied that, if disclosure is relevant to such issues, and is not protected by privilege, it is in this case appropriate to make such order. I have not been satisfied by Mr Peter MacDonald Eggers, who has argued the matter persuasively on behalf of the Underwriters, that an order for disclosure as sought would, in this case, be disproportionate or would be otherwise than necessary and just. The claim by Ariela, resisted by the Underwriters, is for upwards of $1.25m plus interest. There is therefore a considerable sum at stake. The Underwriters’ evidence is that there are some 45 lever arch files for them to consider, and that the costs of the s51 application will be considerably increased if consideration of those files, and the making of disclosure pursuant to such consideration, is necessary. Given that some disclosure is conceded, but, more significantly, that, as will be seen, I am satisfied that, even apart from the contentious issues on this application, there would have been the need for some further disclosure in any event, and that it is required that, in the interests of justice, the issues in contest between Ariela and the Underwriters must be properly considered by the court, I am persuaded that this is a s51 application in which there ought to be an order for disclosure.

As I have said above, before I can consider the contested disclosure, it is necessary for me to decide what the issues are and will be on this application. Mr MacDonald Eggers points to what was stated by Phillips LJ in Chapman Ltd v Christopher and another [1998] 1 WLR 13 at 20F, which I recite subject to my (underlined) amendment to his feature (4), rendered necessary by the subsequent consideration by the Court of Appeal in Cormack v Excess Insurance Co Ltd [2002] Lloyd’s Rep IR 398 at 405 per Auld LJ and Palmer v The Estate of Kevin Palmer deceased and others [2008] EWCA Civ 46, per Rimer LJ at paragraphs 25 to 26. Phillips LJ was reciting the “features relied upon by the plaintiffs”, but it is plain from the decision in Chapman, and from the subsequent judgment of Thomas J in Citibank NA v Excess Insurance Co Ltd [1999] 1 Lloyd’s Rep IR 122, as well as from Cormack and Palmer, that they are (non-exclusive) requirements for success on a s51 application:

In this s51 application, Ariela will be asserting that they have satisfied such features, save insofar as it will be necessary for Ariela to make a minimal adjustment to the effect of feature (5) where, as here, the claim for US$1,296,583, in respect of both dredger and barge, led to recovery of only $6245 (all in respect of the dredger), with an indemnity costs order against Kamal.

I consider first Chapman features (1), (3) and (4), which it is thus common ground are live issues in these s51 proceedings. Mr MacDonald Eggers, in paragraph 25(3) of his skeleton recasts feature (3) as being whether the Underwriters “controlled and conducted the litigation”.

In Chapman, Phillips LJ at 22G-H concluded that the Underwriters:

Plainly here there is no doubt that the Underwriters were exercising their own rights of subrogation in respect of Kamal’s insured claim in instructing Ince & Co in bringing the proceedings against Ariela. But, in paragraph 19 of Mr MacDonald Eggers’ skeleton, he sets out what he calls the subject of common ground as including:

In Thomson, Blake J addressed the relevance of the disclosure there sought (leaving aside issues of privilege):

In my judgment, always subject to questions of privilege, with which I deal below, much of Category 3 (items 12 – 14, 15(a), (c), (d), (e), (i), (j) and (k) and the corresponding ancillary documents in the generic items 17 and 19) is disclosable in respect of Chapman features (1), (3) and (4), and there may well also be disclosable items in Category 2, where no privilege arises - 9(a), (h), (j) and (k).

I turn to the issue which, privilege apart, played the largest role in the contested application before me. This is the issue articulated by Mr Ridley, of Ariela’s solicitors, in his witness statement in support of the application at paragraph 46(g) as being “whether the Underwriters failed to investigate the claim adequately or at all prior to issue of proceedings or at any point in time”. This, as became clear during the course of argument, forms the primary, if not exclusive, basis of the disclosure sought in respect of items 9(b) to (g) (with ancillary generic items 10 and 11) and items 15(b), (g) and (h) (again with ancillary generic items in 16 – 19). The same justification would apply in respect of many of the items referred to in paragraph 12 above, insofar as not otherwise disclosable in accordance with that paragraph.

Mr MacDonald Eggers puts forward substantial reasons why this issue, and hence that disclosure, does not fall within the compass of this s51 application:

He relies on the words of Phillips LJ in Chapman at p22E-F, as followed by Thomas J in Citibank at 131 (“no consideration of the merits”).

He relies on the conclusions of Lightman J in Bristol & West at 144 – 5 (“no consideration of culpable delay”).

So far as concerns the first of such arguments, Mr Timothy Hill QC for Ariela, rightly in my judgment, distinguished what Phillips LJ and Thomas J were there dealing with.

Phillips LJ in Chapman at 22(e) stated as follows:

Thomas J, in Citibank at p131, with reference to Chapman feature (5), namely the failure, in that case, of the defence (in our case, of the claim), stated:

It is plain therefore that what both Phillips LJ and Thomas J were concluding to be irrelevant and unnecessary was consideration of why the claim failed, whether it was thought to be a legitimate or arguable one, for the purposes of the five non-exclusive Chapman features. It is clearly important in all costs applications, not just s51 applications, that there should be no need ordinarily for re-litigation. The claim has failed, and, in the ordinary case, why it failed should not be relevant. That does not necessarily apply, Mr Hill submits, to the issue here asserted (and not previously litigated) that the Underwriters were culpable in not having discovered, when they had the opportunity at a very early stage, and continuing, to discover, that Kamal’s claim was fraudulent from the outset.

Lightman J said as follows in Bristol & West at 145:

Mr Hill seeks to distinguish the conclusion of Lightman J first on what might be called a number of factual bases:

In that case, the respondent to the s51 application was the Solicitors’ Indemnity Fund. As Lightman J recites, the Fund had significant duties to act responsibly and fairly towards solicitors insured under the Scheme, and had to resist any hasty conclusion that they had acted fraudulently. There is no such statutory scheme relevant here.

In Bristol & West there was no question of the SIFL having been in a position to discover and identify the fraud at the outset; hence the only question was whether they prolonged the action by any culpable delay. In this case, the issue relates to whether the Underwriters could and should have discovered the fraud right at the outset when it first inspected and investigated. Thus it is a question of both the bringing and the prolonging of the proceedings.

As appears from his judgment (as referred to in paragraph 4 above), and as appears again at the bottom of the right hand column at p145, he concluded that the s51 application by Bristol was a “fishing expedition”, which I am not asked to do in this case.

Whatever may be the strength of Mr Hill’s arguments that there are such factual distinctions – and of course I am not in any event bound by the judgment of Lightman J, although it must obviously be persuasive – I am in the event primarily persuaded by his argument that in fact Lightman J (and indeed Phillips LJ and Thomas J) did not consider, because it was not put before them, the argument upon the basis of which Mr Hill primarily seeks the disclosure in relation to steps taken or omitted by the Underwriters with regard to investigation of Kamal’s claim. He submits that its relevance is to the question as to whether it is “just and equitable” to make the order under s51 sought. As set out in paragraph 2 above, it is common ground that the applicant must show that it is just and equitable that the order should be made, and it is also common ground that the five features in Chapman are non-exclusive. Mr Hill refers to paragraph 37 of Ariela’s Statement of Case in the s51 proceedings, and in particular subparagraph (a) and (b), namely as follows:

Paragraph 37 of the Statement of Case is denied, in paragraph 30 of the Underwriters’ Defence. But a significant positive case is put forward in Mr MacDonald Eggers’ skeleton before me at paragraph 2:

This was characterised in the course of argument as the “likewise” defence. Notwithstanding the possibility that such stance could be abandoned, which was canvassed during the course of the hearing, Mr MacDonald Eggers did not do so (and perfectly understandably so). But this is only illustrative of the fact that the s51 decision is discretionary, as set out in paragraph 19 above. Indeed, subject to the Underwriters’ case as to privilege, Mr Zavos, in his written statement on their behalf, made it clear that the Underwriters “reject the inference” that they should have been suspicious of the fraud, and he submits (in paragraph 23 of his statement) that any disclosure, if ordered, should be reciprocal as to suspicion or awareness of the fraud.

I am satisfied that it is at least arguable that the issue as to whether the Underwriters could and should have discovered the fraud, and if so when, is and will be as much of an issue on the question of “just and equitable” as the counter-balancing issue that the Underwriters themselves have also been the victims of fraud, and have paid out monies which (like Ariela) they will have great difficulty in, if not impossibility of, recovering from Kamal. This arguable issue was not addressed by Phillips LJ or Thomas J on the one hand, nor by Lightman J on the other, because it was not argued before them. I am satisfied that, since there is such an arguable issue, disclosure should be given.

The claim for privilege relates to item 7 within Category 1 (Ince & Co’s reports referred to in the pleadings) – as to which I am satisfied that privilege has not been waived (nor was such argued) and that, if necessary, the pleadings could be amended, if that was the only reason for disclosure (see Phipson on Evidence 17^th Ed at 26-46): in Category 2 to some of the documents falling within items 12 to 14 and one of items 15 to 19: and (as discussed in paragraph 3 above) to the documents within item 20 and 21 relating to payments. Both legal advice privilege and (so far as relates to the subrogated claims) litigation privilege is relied upon, being the privilege not of Kamal but of the Underwriters themselves. There is of course no suggestion that the Underwriters were party to the fraud: if they had been then the “fraud exception” would apply to them, as it concededly does to Kamal themselves:

But Mr Hill’s submission is that the fraud exception applies even where both a solicitor and the client giving instructions to the solicitor are innocent, but are being used as instruments by third parties to facilitate a fraud. This is the unanimous view of all the academic writing: see Phipson at 26-71, Thanki at 4.48-50, Matthews and Malek: Disclosure (3^rd Ed 2007) at 11-68 and Passmore: Privilege (2^nd Ed) at 8-006. Mr Hill, in the skeleton prepared by him and Mr Jeremy Lightfoot, submits as follows:

the Underwriters were paying Ince & Co to bring and further the fraudulent claim to secure recovery for the Underwriters from Ariela;

the Underwriters gave instructions as to how the fraudulent claim should be progressed;

the Underwriters relied upon fraudulent evidence to try and secure recovery from Ariela;

had the fraud succeeded, the Underwriters would have received sums from Ariela.”

The authority upon which all these academic writers rely is the decision of the House of Lords in R v Central Criminal ex p Francis and Francis [1989] 1 AC 346, and in particular the speech of Lord Goff. The question before the House of Lords related to the construction of s10 of the Police and Criminal Evidence Act 1984, with regard to whether privilege was excluded in respect of the solicitors to a party who had allegedly been provided with money to purchase property by a person suspected of being engaged in drug trafficking, albeit that both that person and the solicitor were assumed to be innocent of complicity in the criminal purpose. Lord Goff considered and resolved the common law position and the applicability of the fraud exception in that situation. At 395E he said as follows:

Mr MacDonald Eggers puts forward three answers to Mr Hill’s proposition and his reliance upon the fraud exception in such circumstances. His first is factual. The Underwriters, he submits, were not “tools” of Kamal. They had what he submits (in paragraph 45 of his skeleton) to have an “independent and legitimate interest in the claim against Ariela pursuant to its rights of subrogation.” To an extent this of course somewhat detracts from and/or is inconsistent with the stance in respect of control and conduct of the litigation and Chapman features (1), (3) and (4) discussed in paragraphs 8-10 above. But it seems to me that there is an unnecessarily pejorative or emotive aspect to the use of the word “tool”. If the question is rather addressed as to whether Kamal, arguably from the outset, used the Underwriters as a mechanism to achieve his fraud, there cannot be any doubt that such is the case. But for the availability of underwriters to pay out this grossly inflated (in respect of the barge non-existent) claim, and then to pursue the insured and uninsured alleged losses, the fraud would never have been commenced, never mind perpetrated.

Mr MacDonald Eggers’ second submission is by reference to a careful analysis of the speeches in the House of Lords in Francis. The decision of their Lordships was by a majority. Lord Goff, Lord Griffiths and Lord Brandon constituted the majority of three, with Lord Bridge and Lord Oliver in the minority. Lord Griffiths agreed in terms with Lord Goff with regard to the proper analysis of the common law. He said as follows at 384H:

Lord Brandon restricted himself to a short assessment (379-381) of the construction of the 1984 Act. He did not address the common law, nor did he express in terms any agreement with Lord Goff or Lord Griffiths: although obviously he did not express any agreement with the minority. Lord Oliver did not express a view about the common law, but he agreed in terms with Lord Bridge (390D). Lord Bridge plainly believed that the majority of the House had decided the question as to common law, because he says as follows at 378C:

Mr MacDonald Eggers bolts on to this submission reliance upon an earlier Court of Appeal decision in Banque Keyser Ullmannn SA v Skandia (UK) Insurance Co Ltd [1986] 1 Lloyd’s Rep 336. This was a case where a fraudulent borrower defrauded a number of banks. The banks, who were the victims of the fraud, subsequently sued their insurers, as assignees of the fraudster, and the insurers unsuccessfully contended that the assignee banks were not entitled to privilege in respect of their own (innocent) communications with their own (innocent) solicitor. Parker LJ said as follows at 337 (right hand column):

Keyser Ullmann of course was a Court of Appeal authority, and antedates the House of Lords’ decision in Francis. In the Court of Appeal in Francis there was reference made to Keyser Ullmann, but only by Lloyd LJ at 355H when he says “I find the facts of that case too far removed from the present case for the decision to be of any assistance.” I assume he means that, in his judgment, the banks were (as Parker LJ said) victims of the fraud, but also, on the facts of that case, not the mechanism of it, unlike the position of the money launderer of drug trafficking proceeds in the case before them. In any event, although Keyser Ullmann is recorded as being cited in argument in the House of Lords, none of their Lordships made any reference to it, not even the dissenters. The academic authorities to whom I have referred all distinguish Keyser Ullmann, and in any event regard it as overtaken by the Francis decision in the House of Lords. There is helpful analysis in Passmore at 8.011-2:

Thanki at 4.56 concludes as follows:

I am satisfied that the common law is as stated by Lords Goff and Griffiths in Francis, and whatever the precise status of the Court of Appeal decision, on the facts or otherwise, in Keyser Ullmann, in this case the innocent underwriters and the innocent solicitors (instructed in part by the innocent underwriters and in part by the fraudulent client) were used as the mechanism for achieving the client’s fraud, the fraud exception applies and there is neither legal advice nor litigation privilege available to the underwriters or the solicitors.

The disclosure sought should be ordered, and I will ask the parties to draw up a relevant order in that regard.