McGraddie v McGraddie & Anor (Scotland : Costs) [2015] UKSC 1

A father successfully recovered a house bought by his son with £285,000 he had provided. After winning in the Supreme Court against legally aided defenders, he sought costs including an ATE insurance premium. The Court held the premium was not recoverable as expenses.

Facts

In February 2007, the pursuer (father) gave the first defender (son) a cheque for £285,000. The defenders spent approximately £85,000 on various items and used £200,000 towards purchasing a house in Stewarton, East Ayrshire, in their own names for £285,000, with the balance raised by mortgage. Following a falling out, the pursuer sought conveyance of the house to him, contending the money had been provided to buy a property for him.

The Lord Ordinary (Lord Brodie) rejected the defenders’ case that the £285,000 was a gift and granted the pursuer substantially the relief sought. The Extra Division allowed the defenders’ appeal, concluding the sum was intended as a gift. The Supreme Court reinstated the Lord Ordinary’s decision ([2013] UKSC 58).

The defenders were legally aided in the Inner House and Supreme Court; the pursuer was not. The pursuer had taken out After the Event (ATE) insurance with a £40,000 premium, providing protection up to £100,000 against potential liability for the defenders’ expenses. The present judgment concerns expenses, including whether the ATE premium is recoverable.

Issues

Two issues arose:

1. Whether the Scottish Legal Aid Board should be ordered to pay the pursuer’s expenses under section 19(1) of the Legal Aid (Scotland) Act 1986.
2. Whether the £40,000 ATE insurance premium paid by the pursuer was recoverable as part of his expenses.

Arguments

The pursuer contended that the ATE premium should be recoverable as part of his expenses, having been reasonably incurred to protect himself before pursuing the appeal. The Board, while not formally conceding the section 19 issue, limited its submissions on that aspect, noting their funding of the defenders’ appeal was based on counsel’s advice and that hindsight should be treated with caution. The Board’s principal contention was that, as a matter of principle, the ATE premium was not properly an item of expenses recoverable from another party.

Judgment

Section 19 Order

Lord Neuberger (with whom Lady Hale and Lord Reed agreed) held there was no difficulty in ordering the Board to pay the pursuer’s costs in both the Inner House and Supreme Court. It would be unjust if the pursuer were out of pocket as a result of an appeal that, but for the grant of legal aid, would probably never have been brought. The defenders themselves could not meet the costs.

Recoverability of the ATE Premium

Although the premium had been reasonably incurred and the pursuer was not especially rich, making it sensible to protect himself, the Court held the ATE premium could not be recovered as expenses.

The Court reasoned that:

• Under rule 46(1) of the Supreme Court Rules, the expression “costs of any appeal” does not naturally extend to an ATE premium, which is extraneous to the costs of the appeal itself.
• In the absence of express provision, a losing party’s liability for a substantial sum should not depend on the successful party’s appetite for and financial ability to bear litigation risk.
• Before the Event (BTE) insurance premiums would plainly not be recoverable, and it would be surprising if wholly different considerations applied to ATE premiums.
• Under rule 42.10 of the Rules of the Court of Session, the premium was not a sum incurred “for conducting the cause” but rather to protect against potential liability arising from conducting it.
• This was reinforced by Lord Carloway’s decision in McNair’s Executrix v Wrights Insulation Co Ltd 2003 SLT 1311, which held an ATE premium was not a recoverable expense.
• The same position obtains in England and Wales absent statutory provision to the contrary, as shown by Callery v Gray (No 1) [2001] EWCA Civ 1117 and Callery v Gray (No 2) [2001] EWCA Civ 1246, and confirmed by the House of Lords ([2002] UKHL 28).

Lord Neuberger expressed regret at this conclusion, considering it unjust that the pursuer should be out of pocket by £40,000, but held the law was clear: absent agreement or specific statutory sanction, a successful party cannot recover an ATE premium as part of expenses.

Implications

The decision confirms that, in Scotland, an ATE insurance premium is not recoverable as expenses from the unsuccessful party in the absence of agreement or specific statutory authorisation. The same general position applies in England and Wales, subject to the statutory regime applicable at the relevant time. The case clarifies that costs rules referring to expenses “reasonably incurred” or sums incurred “for conducting the cause” do not, as a matter of ordinary language, encompass insurance premiums taken out to protect a party against adverse costs liability.

The judgment is significant for litigants considering ATE cover in Scottish proceedings: although such insurance may be a sensible protective step, the premium cannot be passed on to the losing party as part of recoverable expenses. The decision also illustrates the operation of section 19 of the Legal Aid (Scotland) Act 1986, demonstrating that where a legally aided appeal is supported by the Board but ultimately fails, the Board may be ordered to meet the unassisted party’s expenses where just and equitable.

The Court’s expression of regret highlights a perceived gap or injustice in the current rules, but the decision makes clear that any remedy must come through legislative or rule changes rather than judicial extension of the concept of recoverable expenses.

Verdict: The Supreme Court awarded the pursuer his expenses of the appeals to the Inner House and the Supreme Court against the Scottish Legal Aid Board under section 19 of the Legal Aid (Scotland) Act 1986, but directed that those expenses should not include the £40,000 ATE insurance premium, which was held not to be recoverable as a matter of law.

Source: McGraddie v McGraddie & Anor (Scotland : Costs) [2015] UKSC 1