UK: Security For Costs: Is Attack The Best Form Of Defence?

The purpose of the security for costs regime is well known: to ensure that a party which is on the offensive makes provision to the court’s satisfaction for any costs order if he is unsuccessful at the end of the case. The regime applies particularly to companies under s726 of the Companies Act 1995 and under the Civil Procedure Rules (CPR).

Typically orders for security for costs are made against claimants. However defendants are not immune and a claimant faced by a counterclaim made by a defendant who might struggle to pay costs if the counterclaim fails, will give careful consideration to the possibility of forcing the counterclaiming defendant to provide security for costs in the form of a payment into court or a satisfactory bond/guarantee. Counterclaiming defendants should therefore be aware of this risk. Hence the question, is attack always the best form of defence?

This area of the law was considered in Thistle Hotels Ltd v Orb Estates et al (3 February 2004).

In a share sale agreement in March 2002 between Thistle and Orb, 37 out of Thistle’s 55 hotels were transferred to Orb. Thistle continued to manage the hotels pursuant to an operating and relationship agreement. Disagreements arose over aspects of the share sale agreement in relation to managing intra-group debt in a technical payment mechanism and this led to Thistle instigating proceedings.

The position of Orb itself was settled by consent but two of the defendants, Gamma Four Ltd (’Gamma’) and Euro and UK Property Ltd (‘Euro’), both companies within the Orb group, chose to defend the claims against them and launched counterclaims based on breach of warranty and misrepresentation. Thistle applied under CPR Part 25.12 for security for costs.

The conditions to be satisfied are set out in Part 25, and form two separate tests. One must first show that the party falls into an exhaustive category which lists scenarios where the payment of costs would be unlikely to be forthcoming or not easily obtainable. In the usual type of case, security is ordered against an impecunious company or one which is resident out of jurisdiction such that there would be additional costs in enforcing a costs order. As a question of fact, it was held that Gamma’s and Euro’s position fell within this category.

Before the court has discretion to make the order, one must also show that it would be just to do so. Relevant considerations in this regard have included whether the application is made in good faith, whether it is made oppressively to stifle a genuine claim, or whether the actual claim has good prospects of success.

This more interesting question in the present case showed the court’s attitude towards making an order for security for costs on the counterclaim and the factors the court will look at in deciding when a counterclaim goes beyond a defence, making it vulnerable to a security for costs order. This is not always an easy issue and as the judge, Sonia Proudman QC, observed:-

‘‘an impecunious defendant is not to be prejudiced in defending the main claim by an order for security on the counterclaim’’ (para. 28).

Although the counterclaim raised a separate head of claim, Gamma and Euro argued that it nevertheless raised the same issues of fact and the same evidence would be deployed dealing with the counterclaim as with the defence itself. They argued that the court’s discretion to order security should not therefore be exercised.

The authorities confirmed that security for costs should not be ordered against a counterclaiming defendant where the defendant is, as a question of substance, not formality or pleading, simply defending itself. The important contrast was with a situation where the defendant has gone beyond mere self-defence and launches a cross-claim, ‘‘with an independent vitality of its own’’ (Bingham LJ in Hutchinson Telephone (UK) Ltd [1993]). In that case, in the context of disputes arising over an agreement for the marketing of cellular telephones, there were complex discrete issues raised by the counterclaiming defendant, including claims for injurious falsehood. This substantially enlarged the scope of the issues raised in the litigation and the counterclaim would be time consuming and expensive to investigate. Applying those principles to the Orb case, what was called for was that:-

‘‘the substance of each claim … be considered and whether, and if so how far, the counterclaim enlarges the ambit of the action in terms of issues, time and costs’’.

The size of the counterclaim compared to the claim, although a relevant factor, is not determinative as it does not go to the qualitative nature of that claim.

In the event, it was found that Gamma’s and Euro’s counterclaims required detailed investigation into facts well beyond those required to make good their defences. The counterclaim would involve detailed investigations into, and decisions on, law and fact, and related expert evidence. The judge held that the counterclaims therefore went beyond a ‘‘mere defence’’ and did have independent vitality. The alleged misrepresentation and breach of warranty went beyond the disputes on the technical payment mechanism in the share sale agreement on which the claim itself was based. Gamma and Euro were therefore ordered to put up security for Thistle’s costs.

This judgment is a useful remainder that a defendant which launches a counterclaim is not safe from the risk of security for costs. It is not just claimants who need to think in advance about the risk of an order for security for costs, and how they might cope with it. For all parties susceptible to a security for costs order there is scope for tactical thinking. Is it better to wait to be sued rather than take the initiative and face a certain order for security? Is it actually necessary to make a counterclaim in addition to a defence and set-off? If a counterclaim is required can liability issues be linked to the defence with a view to avoiding security on the ground that time consuming issues relating to the quantification of the counterclaim can be deferred to a later date?

A financially weak corporate defendant should therefore think hard about the benefit of launching a counterclaim which is lacking in merit. It is likely to be better off concentrating on its defence and avoiding the tactical set back of a successful security for costs application which may force it to drop the counterclaim in any event. The Orb case helps to highlight that the best form of defence is not always attack. 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.