p. 30626. Security for Costs
- Stuart SimeStuart SimeHead of Department, Academic Programmes, The City Law School, City, University of London
Abstract
The question of who pays for the costs of a claim is generally not determined until the claim is finally disposed of, whether by consent, interim process, or trial. However, an order for security for costs can be made against a party in the position of a claimant. Once security is given it may be retained, subject to the court’s discretion, pending an appeal. An order for security for costs usually requires the claimant to pay money into court as security for the payment of any costs order that may eventually be made in favour of the defendant, and staying the claim until the security is provided. On the application three issues arise: (i) whether one of the conditions for ordering security for costs is satisfied; (ii) if so, whether, having regard to all the circumstances of the case, it would be just to exercise the court’s discretion in favour of making the order; and (iii) if so, how much security should be provided. This chapter considers each of these three issues. It begins by looking at the procedure for making the application and the capacity of the respondent to the application.
26.01 Generally, the question of who pays for the costs of a claim is not determined until the claim is finally disposed of, whether by consent, interim process, or trial. This is because the usual rule is that the successful party recovers costs from the loser and the outcome on the merits is known only when judgment is obtained. It is for this reason that the parties are not generally allowed to anticipate the eventual costs order by asking for interim orders that their opponents provide funds as security to pay for the costs of the claim. Despite this, it is accepted that there have to be exceptions for cases where there is a significant risk of defendants suffering the injustice of having to defend proceedings with no real prospect of being able to recover costs if they are ultimately successful. An order for security for costs does not infringe the European Convention on Human Rights, art 6(1), although the right of access to the courts has to be taken into account: Nasser v United Bank of Kuwait [2002] 1 WLR 1868.
26.02 An order for security for costs can be made only against a party in the position of a claimant. Once security is given it may be retained, subject to the court’s discretion, pending an appeal. An order for security for costs usually requires the claimant to pay money into court as security for the payment of any costs order that may eventually be made in favour of the defendant, and staying the claim until the security is provided. On the application three matters arise:
whether one of the conditions for ordering security for costs is satisfied;
if so, whether, having regard to all the circumstances of the case, it would be just to exercise the court’s discretion in favour of making the order; and
if so, how much security should be provided.
26.03 Each of these three matters will be considered after first looking at the procedure for making the application and the capacity of the respondent to the application.
A Procedure
26.04 The first application for security should normally be made at the first CMC (see Commercial Court Guide, app 10, para 1). It is made using the usual Part 23 procedure of issuing an application notice supported by written evidence. The written evidence should deal with the grounds on which security is sought, and with any factors relevant to the exercise of the court’s discretion. These include the location of the claimant’s assets, and any practical difficulties in enforcing any order for costs (see Commercial p. 307Court Guide, app 10, para 3). It also needs to include an estimate of the defendant’s likely costs of defending the claim, which should usually be given in the same form of statement of costs as is used for summary assessments and exhibited to the written evidence.
26.05 Invariably the application should be made on notice to the claimant, and should be served on the claimant at least three clear days before the day appointed for hearing the application (CPR, r 23.7(1)(b)). An application may be made for further security or to vary the terms on which security is given if there is a material change of circumstances. Applications for security for costs will be inappropriate in cases on the small claims track because generally costs are not recoverable, and will be unusual in fast and intermediate track claims because of the limits imposed by fixed recoverable costs.
B The Respondent
26.06 An order for security for costs can be made only against a party acting as a claimant (CPR, r 25.12(1)). This means that security for costs can be ordered against a defendant who counterclaims against a claimant. However, with regard to counterclaims, a distinction needs to be drawn between simple counterclaims, where it is possible to obtain orders for security against defendants (Hutchison Telephone (UK) Ltd v Ultimate Response Ltd [1993] BCLC 307), and set-offs, where it has been held that security will not usually be ordered: Neck v Taylor [1893] 1 QB 560. The reason for this distinction is that a set-off, if established, amounts to a defence to the claim, so a defendant raising a set-off is for this purpose regarded as simply defending and not as advancing a claim.
26.07 A defendant who issues an additional claim form stands in the position of a claimant with regard to the third party, so may be ordered to provide security for the third party’s costs. However, the original claimant does not stand in the position of a claimant with regard to a third party brought in by the original defendant, unless, as a result of directions given in the additional claim, the third party is ordered to defend jointly with the original defendant (Taly NDC International NV v Terra Nova Insurance Co Ltd [1985] 1 WLR 1359 per Parker LJ). The question is one of capacity in the main action. There is therefore no jurisdiction to order a defendant to provide security for the costs of any interim application it may make: Taly NDC International NV v Terra Nova Insurance Co Ltd.
26.08 Security for costs may be ordered against any party in the position of a claimant, even if not strictly a ‘claimant’. An example is a petitioner on an unfair prejudice petition under the Companies Act 2006, s 994: Re Unisoft Group Ltd (No 1) [1993] BCLC 1292. Another example is an appellant to an appeal (or a respondent who cross-appeals): see CPR, r 25.15. By r 25.14, an order for security for costs may also be made against someone other than a claimant if the court is satisfied that the person against whom the order is sought either:
assigned the claim to the claimant with a view to avoiding the possibility of being ordered to pay costs; or
has contributed or agreed to contribute to the claimant’s costs in return for a share of any money or property which the claimant may recover in the proceedings.
C Conditions for Granting Security for Costs
26.09 Security for costs can be ordered only if one of the conditions set out in CPR, r 25.13(2), is satisfied. The conditions are:
the claimant is a company or other body (whether incorporated inside or outside Great Britain) and there is reason to believe that it will be unable to pay the defendant’s costs if ordered to do so;
the claimant has changed his address since the claim was commenced with a view to evading the consequences of the litigation;
the claimant failed to give his address in the claim form, or gave an incorrect address in that form;
the claimant is acting as a nominal claimant, other than as a representative claimant under Part 19, and there is reason to believe that he will be unable to pay the defendant’s costs if ordered to do so;
the claimant has taken steps in relation to his assets that would make it difficult to enforce an order for costs against him.
26.10 By a combination of CPR, r 3.1(2)(f) and (3)(a) the court has a power to make an order equivalent to providing security for costs in a number of situations. These include granting security for costs as a sanction for breach of directions (Olatawura v Abiloye [2003] 1 WLR 275 and see Chapter 37); or as a conditional order on an application for summary judgment (Allen v Bloomsbury Publishing plc [2011] FSR 22; and see 24.43); or as a condition on setting aside a default judgment (see 13.40); or in relation to an appeal (Shlaimoun v Mining Technologies International Inc [2012] EWCA Civ 772). None of these situations should be regarded as a less onerous route to obtaining an order for security for costs, and the court must still bear in mind the principles in rr 25.12 and 25.13 before making such an order (Huscroft v P&O Ferries [2011] 1 WLR 939).
Resident outside the jurisdiction
26.11 Residence is determined by the claimant’s habitual or normal residence, as opposed to any temporary or occasional residence (see Lysaght v Commissioners of Inland Revenue [1928] AC 234, a tax case, and R v Barnet London Borough Council, ex p Shah [1983] 2 AC 309, a case on entitlement to a grant for education, as applied in Parkinson v Myer Wolff (23 April 1985, unreported), a case on security for costs). The question is one of fact and degree, and the burden of proof is on the defendant. An English merchant seaman should not be regarded as ordinarily resident abroad, nor should someone who intends to emigrate until he or she has left the country: Appah v Monseu [1967] 1 WLR 893. A foreign business person who makes regular visits to England would probably be regarded as resident abroad, but there will come a point, through the length of time spent in this country and other factors, such as owning a house here, when ordinary residence will be established.
26.12 Although most companies reside in the country where they are incorporated, strictly they reside where their central control and management are. This is a question of fact. In Re Little Olympian Each Ways Ltd [1995] 1 WLR 560 Lindsay J identified the following as matters to be considered: the contents of the company’s objects clause, its place of incorporation, where its real trade or business is carried on, where its books are kept, where its administrative work is done, where its directors meet or reside, where it ‘keeps house’, where its chief office is situated, and where its secretary resides.
26.13 The wording of CPR, r 25.13(2)(a)(ii) was altered to take into account De Beer v Kanaar & Co [2003] 1 WLR 38 and it means that security for costs can be ordered where the claimant is resident in a jurisdiction outside the scope of the Hague Convention 2005, even if the claimant has assets within a contracting state.
26.14p. 309 Security for costs may be ordered where there are joint claimants, some of whom are resident outside the jurisdiction. According to Lord Donaldson of Lymington MR in Corfu Navigation Co v Mobil Shipping Co Ltd [1991] 2 Lloyd’s Rep 52 the basic principle underlying CPR, r 25.13(2)(a), is that it is prima facie unjust for a foreign claimant, who is in practical terms almost immune from the enforcement of any costs order that may be made, to be allowed to proceed with a claim without making funds available within the jurisdiction against which such an order can be enforced. It would, however, be appropriate to refuse to order security where it is probable that each of the joint claimants will be held to be liable for all the defendant’s costs if the claim is unsuccessful, provided the English claimants are likely to be able to pay those costs (Winthorp v Royal Exchange Assurance Co (1755) 1 Dick 282 as explained in Slazengers Ltd v Seaspeed Ferries International Ltd [1987] 1 WLR 1197 and in the light of Corfu Navigation Co v Mobil Shipping Co Ltd). Conversely, security may well be ordered where the English claimants are joined for the purpose of defeating an application for security (Jones v Gurney [1913] WN 72), where it is impossible to predict the likely outcome on costs, or where each claimant is likely to be liable for only a portion of the defendant’s costs: Slazengers Ltd v Seaspeed Ferries International Ltd [1987] 1 WLR 1197; [1988] 1 WLR 221.
Impecunious company
26.15 Impecuniosity is no ground for ordering security for costs against an individual claimant, the principle being that individuals should not be prevented from seeking justice through want of means. Companies, being artificial persons, need no such protection. Ground (c) applies to limited companies registered under the Companies Acts, and also unlimited companies, companies with a single member (Jirehouse Capital v Beller [2009] 1 WLR 751), and other corporations.
26.16 The defendant has the burden of proving that a claimant company will be unable to pay any costs that ultimately may be awarded in the defendant’s favour. Proof that the company is in liquidation is prima facie evidence that it will be unable to pay any costs order: Northampton Coal, Iron and Waggon Co v Midland Waggon Co (1878) 7 ChD 500. Otherwise, what is now CPR, r 25.13(2)(c) requires credible testimony of the company’s inability to pay. This obviously requires a comparison between the company’s assets and the likely costs. Inability to pay may be inferred from evidence that the claimant has declared unusually large dividends after the dispute arose: Frost Capital Europe Ltd v Gathering of Developers Inc Ltd (2002) LTL 20/6/02.
Nominal claimant
26.17 Typical attributes of a nominal claimant include having no personal connection with the claim (other than legal title to bring the proceedings), no role in raising the funds to finance the litigation, and no interest in the final outcome (Allen v Bloomsbury Publishing plc (2011) LTL 18/3/11). An element of duplicity is normally required. Being a trustee, executor, or personal representative (even without also being a beneficiary) does not make the claimant nominal (Chuku v Chuku [2017] 1 WLR 3137).
Taking steps to avoid enforcement
26.18 Under CPR, r 25.13(2)(g), security for costs may be ordered where the claimant has taken steps in relation to his assets to make it more difficult to enforce an order for costs. There is no need under this paragraph to show that steps were taken with a view to making enforcement more difficult: the test is objective, and motive is irrelevant (Bush v Bank Mandiri (Europe) Ltd (2014) LTL 11/2/14). Thus, in Aoun v Bahri [2002] 3 All ER 182 security for costs was ordered because the claimant had sold his home in Australia, which made it p. 310objectively more difficult to enforce a costs order against him, even though there was no evidence that this was done with a view to avoiding paying costs.
Security for costs of appeals
26.19 By virtue of CPR, r 25.15, the court may order security for costs against an appellant in respect of the costs of the appeal on the same grounds as security may be ordered against a claimant under r 25.13. The rule only applies once permission to appeal (see 50.18) has been granted (Kevythalli Design v ICE Associates [2010] EWCA Civ 379). Likewise, a respondent who cross-appeals may be ordered to provide security for the costs of the cross-appeal.
D Discretion to Order Security for Costs
26.20 Once it has been established that the case comes within one of the conditions set out in 26.09, the court has a general discretion whether to grant an order for security. In exercising this discretion the court will have regard to all the circumstances of the case, and consider whether it would be just to make the order (CPR, rr 25.13(1)(a) and 25.14(1)(a)).
Pre-CPR principles
26.21 There is a conflict in the Court of Appeal authorities on the extent to which it is appropriate to consider the pre-CPR cases on the exercise of the discretion to award security for costs. This reflects the wider conflict on whether the introduction of the CPR has achieved its objective of making a new start based on the fact it was a new procedural code (see 4.19 and 4.20). One view, exemplified by Nasser v United Bank of Kuwait [2002] 1 WLR 1868, is that the substantial body of pre-CPR case law is consigned to history. On this basis, the discretion has to be exercised applying the overriding objective, and by affording a proportionate protection against the difficulty identified by the ground relied upon as justifying security for costs in the case in question.
26.22 Other cases, such as Vedatech Corporation v Seagate Software Information (2001) LTL 29/11/01, expressly apply pre-CPR principles, particularly those laid down in Sir Lindsay Parkinson & Co v Triplan Ltd [1973] QB 609. In that case Lord Denning MR said the following factors are relevant when the court is exercising its discretion whether to order security for costs:
whether the claim is bona fide and not a sham. Factors to be taken into account on this are:
whether the claimant has reasonably good prospects of success;
whether the defendant has made any admissions in its statement of case or elsewhere; and
whether there has been a substantial offer to settle (as opposed to a small offer to get rid of a nuisance claim);
whether the defendant is using the application for security oppressively so as to stifle a genuine claim;
delay in making the application.
Prospects of success
26.23 There is no doubt that the prospect of success at trial can sometimes be taken into account on the application. If this is taken too far, an application for security may be blown up to an investigation similar to a trial. In a passage approved by the Court of Appeal in Trident International Freight Services Ltd v Manchester Ship Canal Co [1990] BCLC p. 311263, Browne-Wilkinson V-C in Porzelack KG v Porzelack (UK) Ltd [1987] 1 WLR 420 said at 423:
Undoubtedly, if it can clearly be demonstrated that the [claimant] is likely to succeed, in the sense that there is a very high probability of success, then that is a matter that can properly be weighed in the balance. Similarly, if it can be shown that there is a very high probability that the defendant will succeed, that is a matter that can be weighed. But for myself I deplore the attempt to go into the merits of the case, unless it can clearly be demonstrated one way or another that there is a high degree of probability of success or failure.
26.24 If there is no defence to the claim, it will almost certainly be unjust to order security. In such a case the defendant is highly unlikely to recover costs in any event, and ordering security often has the practical effect of preventing the claimant from proceeding with the claim.
Stifling a genuine claim
26.25 The question of stifling a genuine claim is a corollary to the question whether the claimant’s claim is a sham. The essential policy is that the need to protect the defendant has to yield to the claimant’s right of access to the courts to litigate the dispute if it is a genuine claim: Hamilton v Al Fayed (No 2) [2003] QB 1175, a case on costs orders against non-parties, where the importance of the European Convention on Human Rights, art 6(1), was stressed. Where the claimant’s claim has a good chance of success (there being no need for anything higher), the court will hesitate before making an order which will have the practical effect of preventing the claimant from proceeding. If the case is one where the court feels that security should be ordered, it can fix the amount of the security at a level which will not stifle the claimant in proceeding further: Innovare Displays plc v Corporate Broking Services Ltd [1991] BCC 174. It is for the company to establish, on the balance of probabilities, that the funds to pay the security will not be made available to it, whether by a major shareholder or some other closely related person, taking into account the separate legal personality of a company (Goldtrail Travel Ltd v Onur Air Tasimacilik AS [2017] 1 WLR 3014). For this purpose, the court does not have to take at face value protestations by the company that no funds will be made available, particularly where a wealthy owner has in the past provided funds when required.
Delay in applying
26.26 Applications for security for costs should be made at an early stage in the proceedings. Lateness may of itself be a reason for refusing an order. There have been cases where security has been refused because the application was made just a few days or even a few hours before the trial. An example is Innovare Displays plc v Corporate Broking Services Ltd [1991] BCC 174 where a reduced order was made on account of delay.
Resident outside the jurisdiction
26.27 Where security is sought against a claimant outside the Hague Convention 2005 States, the order should reflect the obstacles in the way of, or the costs of, enforcing an English judgment for costs against the particular claimant or in the particular country concerned: Nasser v United Bank of Kuwait [2002] 1 WLR 1868. It is the difficulty of enforcing in the place where the assets are likely to be, rather than enforcement in the country where the respondent happens to live, that has to be considered: Aims Asset Management v Kazakhstan Investment Fund Ltd (2002) LTL 22/5/02. Orders have been refused on account of the ease of enforcement in Monaco (Somerset-Leeke v Kay Trustees [2004] 3 All ER 406) and the British Virgin Islands (Longstaff International Ltd v Baker and McKenzie [2004] p. 3121 WLR 2917). Having considered the evidence, according to Texuna International Ltd v Cairn Energy Ltd [2005] 1 BCLC 579, the court has to decide whether the claimant’s country is:
one where the obstacles to enforcement are so great that the claimant should be required to give security for the whole costs of the claim; or
one where enforcement is simply more expensive than in England and Wales. In these cases the security should reflect the likely additional expense.
26.28 Since the effectiveness of enforcement is the most important consideration, the following factors need to be taken into account if present:
whether the claimant has substantial assets within the jurisdiction. If so, this is a weighty factor against ordering security: De Bry v Fitzgerald [1990] 1 WLR 552. Assets within the jurisdiction include damages which the claimant hopes to recover in other proceedings: Cripps v Heritage Distribution Corporation (1999) The Times, 10 November 1999;
the degree of permanence of those assets, and whether the claimant has a substantial connection with this country: Leyvand v Barasch (2000) The Times, 23 March 2000;
the ability of the claimant to transfer assets around the world, as in Berkeley Administration Inc v McClelland [1990] 2 QB 407.
Impecunious company
26.29 The rationale behind ordering security against an impecunious company is to safeguard the defendant against the prospect of encountering real difficulty in enforcing any order for the costs of the claim. Megarry V-C in Pearson v Naydler [1977] 1 WLR 899 said, at 906:
It is inherent in the whole concept of [CPR, r 25.13(2)(c)] that the court is to have power to order the company to do what it is likely to find difficulty in doing, namely to provide security for the costs which ex hypothesi it is likely to be unable to pay. At the same time, the court must not allow the [rule] to be used as an instrument of oppression, as by shutting out a small company from making a genuine claim against a large company.
26.30 The critical question is whether the company will be able to meet the costs order at the time when the order has to be paid (Re Unisoft Group Ltd (No 2) [1993] BCLC 532 at 534). The court must consider the nature and liquidity of the company’s assets (Longstaff International Ltd v Baker and McKenzie [2004] 1 WLR 2917). It will also take into account whether the company’s want of means has been brought about by any conduct by the defendant, such as, in a claim for breach of contract, delay in payment, or the defendant’s delay in performing its part of the contract (Interoil Trading SA v Watford Petroleum Ltd (2003) LTL 16/7/03).
E Amount
26.31 Procon (Great Britain) Ltd v Provincial Building Co Ltd [1984] 1 WLR 557 establishes the principle that any security should be such as the court thinks just in all the circumstances. The amount should be neither illusory nor oppressive (Hart Investments Ltd v Larchpark Ltd [2008] 1 BCLC 589). In applications under r 25.13(2)(a) the amount is usually based on the additional costs of enforcing any judgment for costs in the overseas jurisdiction (Relational LLC v Hodges [2011] EWCA Civ 774). Applications based on the other grounds may result in security based on the total costs of defending the claim (Danilina v Chernukhin [2019] 1 WLR 758). It is usual to exhibit a summary statement of costs to the defendant’s evidence in support.
26.32p. 313 As was mentioned at 26.25 and 26.26, relevant factors going to the court’s discretion which are in the claimant’s favour, but which are not strong enough to deprive the defendant of an order for security, may be taken into account when deciding the amount of security to order. Thus, delay in making the application and difficulty faced by the claimant in providing security may be taken into account (Innovare Displays plc v Corporate Broking Services Ltd [1991] BCC 174), as may the risk of stifling a genuine claim (Danilina v Chernukhin [2019] 1 WLR 758).
F Order
26.33 Orders for security for costs should follow form PF 44. It is usual to require security to be given by payment into court (Infinity Distribution Ltd v The Khan Partnership LLP [2021] 1 WLR 4630), although bonds, guarantees, solicitors’ undertakings, and ATE insurance are possible alternatives. While there is jurisdiction to require the defendant to give a cross-undertaking in damages, this is only likely to be appropriate in a rare and exceptional case (Rowe v Ingenious Media Holdings plc [2021] 1 WLR 3189). Until security is given the claim will be stayed. If the claimant fails to provide security in compliance with the order, the defendant can apply for the claim to be struck out: Speed Up Holdings Ltd v Gough and Co (Handly) Ltd [1986] FSR 330. If security is provided, the claim continues. After trial, the defendant, if successful, will have a secured fund from which its costs can be paid.
26.34 In the Commercial Court defendants are sometimes required to give undertakings in damages if security is ordered, and instead of ordering a stay it is more usual to give a time for providing the security with liberty to apply for dismissal of the claim in the event of default.
G Success by the Claimant
26.35 In cases where the claimant is successful, normally the trial judge will accede to an application on the claimant’s behalf for the security money in court to be repaid to the claimant, or for the release of any other security. If the defendant wishes to appeal, however, the court has a discretion whether to impose a stay on the release of the security so as to provide continued security for the costs up to trial in the event that the defendant’s appeal succeeds: Stabilad Ltd v Stephens and Carter Ltd [1999] 1 WLR 1201. In considering whether to impose such a stay, Auld LJ said that the fact that the claimant had succeeded at first instance was irrelevant. Factors to be considered were the risks of the claimant being unable to pay the costs to trial if the security was released, the claimant’s need for the money provided as security for fighting the appeal, and the prospects of the appeal succeeding.
Key Points Summary
26.36
An order for security for costs requires a claimant to provide a fund which can be used by the defendant to pay its costs if it defeats the claim.
Security for costs is only available against claimants and parties in the position of claimants.
The main grounds for seeking security for costs are that the claimant is resident outside the European Union, that it is a company in financial difficulties, or that the claimant has taken steps to avoid enforcement.
If a ground is made out, the court retains a discretion to refuse security for costs.
The court also has a wide discretion on the amount of security to be provided.