UK: Recent Developments - Security For Costs

Last Updated: 8 December 2016
Article by Anna Myrvang

Recent decisions on security for costs provide a useful reminder of how the court will apply the rules and exercise its discretion, together with insight into the scope of the court's powers to make ancillary or related orders.

An order for security for costs requires a person (usually a claimant, although sometimes a third party) to provide an acceptable form of security (whether by way of a payment of money into court, a guarantee or bond or similar) in respect of a party's litigation costs. The order is available in prescribed situations, subject to the discretion of the court.

This protection is afforded to those on the receiving end of a claim (including additional claims, for the purposes of Part 20 of the CPR) or an appeal, because defendants should not be exposed to the risk of there being no assets against which a costs award can be enforced where they have been forced into expending costs defending an unmeritorious claim or appeal, or to the risk of incurring additional costs necessitated by enforcement action in a jurisdiction where the process of enforcement may be more onerous than here.

The primary rules and conditions for such an order are in Part 25 of the CPR (CPR rules 25.12 – 25.15), although security can also be ordered by the court in the exercise of its general case management powers (including under CPR rules 3.1(3), 3.1(5) and 52.9(1)).

The discretion of the court in awarding an order of this nature is wide. The rules provide that the court, having regard to all the circumstances of the case, has to be satisfied that not only are the relevant conditions met, but also that it is just to make the order. The assessment will necessarily be fact dependent.

The following points arise from recent judgments which will be of interest to a party who is considering making or defending an application for security.

1. The standard of proof for the applicant is lower than the balance of probabilities

Master Matthews confirmed the relevant test in his judgment of 20 April 2016 in Coral Reef Limited v (1) Silverbond Enterprises Limited (2) Eiroholdings Invest [2016] EWHC 874 (Ch), "I have to consider, on the totality of the evidence before the court, whether I am satisfied that there is reason to believe that the Claimant ... will be unable to pay the Defendants' costs if ordered to do so. I do not have to be satisfied that the Claimant will be unable to pay, only that there is reason to believe it. That is a lower standard than, say, the balance of probabilities [Jirehouse Capital v Beller [2009] 1 WLR 751]".

Lady Justice Gloster, in her judgment of 8 November 2016 in Bestfort Developments LLP and others v Ras Al Khaimah Investment Authority and Others [2016] EWCA Civ 1099, considered whether the provisions of and case law on the European Human Rights Convention might require a more stringent application of the test (i.e. the higher "likelihood" burden), in circumstances where the application is against a claimant resident outside either the United Kingdom or a Convention state. She concluded this was not the case. An order for security for costs is capable of amounting to discrimination on grounds of national origin unless the making of the order is objectively justified [Nasser v United Bank of Kuwait [2001] EWCA Civ 556]. However, "the test of real risk of enforceability provides rational and objective justification for discrimination against non-Convention state residents". "Likelihood" was the wrong standard of proof, also in these circumstances.

2. The courts will not ignore the existence of an ATE policy – they will consider whether the policy will respond

Mr Justice Snowden, in his decision of 24 October 2016 in Premier Motorauctions Ltd and another v PricewaterhouseCoopers LLP and another [2016] EWHC 2610 (Ch), noted that the court will look at the assets available to meet an adverse costs order and there is no reason in principle why the existence of an ATE policy should not be taken into account in this regard. The relevant question "is whether, having regard to the terms of the ATE policy in question, the nature of the allegations in the case and all the other circumstances, there is reason to believe that the ATE policy will not respond so as to enable the defendant's costs to be paid."

3. In order to argue that providing security would effectively 'stifle' the claim, the claimant needs to provide evidence regarding its ability and efforts to obtain funding

Mr Justice Snowden, in Premier Motorauctions, noted the public interest in, and the role of, ATE insurance on appropriate terms in providing access to justice for insolvent companies under the control of responsible insolvency office-holders. He then went on to note that, had the jurisdictional threshold for CPR 25.13 been crossed in this case, "on the current (lack of) evidence as to the efforts made by the Joint Liquidators to seek alternative sources of funding for the case, I would have been unlikely to have refused an order for security for costs on the basis that to do so would have stifled the claim".

His Honour Judge Hacon, by his decision of 13 April 2016 in New Tasty Bakery Ltd v MA Enterprise (UK) Ltd [2016] EWHC 1038 (IPEC), also noted the obligation on a claimant to produce satisfactory evidence that it did not have funds and could not obtain them from another source, e.g. a third party who might reasonably be expected to provide them [Al-Koronky v Time Life Entertainment Group Limited [2005] EWHC 1688]. Without such evidence, no great weight could be given to the argument that the claim would be stifled by an order that the claimant provides security for costs.

4. '(In)equality' of the parties – and the case law on security for costs 'trumps' the generalised terms of the overriding objective

In a case in which applications had been made for security both in respect of a claim and counterclaim, Lord Justice Hamblen noted that where "a counterclaim does have independent vitality, the appropriate order will ordinarily be that both parties provide security, or that neither party does so" (judgment of 6 October 2016, Dawnus Sierra Leone Ltd v Timis Mining Corporation Ltd [2016] EWCA Civ 1066).

In the face of an argument that justice demands that both parties are put on equal footing in accordance with the overriding objective, he went on to note that the: "basic rule ... is that security is provided by the Claimant alone and, therefore, that the parties are not treated equally. That rule may, of course, be departed from and often will in cases involving a claim and counterclaim. Guidance on whether or not it will be appropriate to do so is to be found in the case law on security for costs rather than the generalised terms of CPR Rule 1.1.(2)(a)."

5. Protection may be more appropriate to cover the (additional) costs burden of any enforcement action

In a decision of 21 March 2016 in Sheikh Tahnoon Bin Saeed Bin Shakhboot Al Nehayan v John Kent (aka Joannis Kent) [2016] EWHC 623 (QB), Mrs Justice Nicola Davies considered evidence regarding the enforcement of English money judgements in the UAE. She noted that, notwithstanding the difficulties that were identified, nowhere in the report did the expert state that the defendant could not successfully obtain enforcement. To "infer ... that it is likely that the defendant would be unable to enforce an order for costs against the claimant in the courts of the UAE would be to enter into the realm of speculation". She considered that the more appropriate order in the circumstances would be security with regards to the additional costs of enforcement action in the UAE.

6. Past conduct is relevant in the context of security on appeal, but the court can make an order even without relevant past conduct

In the Court of Appeal decision of 7 July 2016 in Merchant International Co Ltd v Natsionalna Aktsionerna Kopmaniia Naftogaz Ukrainy [2016] EWCA Civ 710, Lord Justice Christopher Clarke considered authorities regarding the ordering of a payment into court as a condition of pursuing an appeal. He noted that "Whilst every case depends on its particular facts the court is likely to find there to be a compelling reason to make a security payment order which has [the effect of securing enforcement] if the judgment debtor has in the past [Dumford Trading Ag v OAO Atlantrybflot [2004] EWCA Civ 1265] or is likely in the future [Wittman (UK) Ltd v Willdav Engineering SA [2007] EWCA Civ 521] to take steps to denude itself of assets or to put its assets beyond the reach of normal enforcement processes". However, he went on to note "There may be a compelling reason to make a security order even if it is not established that the appellant has acted [in this way]. This may be the case if there are considerable practical difficulties in effecting execution".

7. Third parties

A number of decisions this year have shed light on the position of third parties when it comes to security for costs applications.

In the 21 January 2016 Court of Appeal decision in Deutsche Bank A.G. v (1) Sebastian Holdings Inc. (2) Alexander Vik [2016] EWCA Civ 213, Lord Justice Moore-Bick agreed with the observation by Mr Justice Cooke at first instance, that a defendant's failure to apply for security does not preclude a successful application for an order for costs against a third party.

Master Kay QC, in his decision of 30 June 2016 in M.A. Lloyd & Son Ltd (In Administration) v PPC International Ltd (t/a Professional Powercraft) [2016] EWHC 1583 (QB), held that an application for wasted costs against a third party did not constitute a substantive claim against that third party that would allow the third party to seek security for their costs of defending the application.

In his decision of 7 October 2016 in Wall v The Royal Bank of Scotland plc [2016] EWHC 2460 (Comm), Mr Andrew Baker QC found that, in circumstances where a claimant is being funded by a third party (or there is good reason to believe that it is being funded), such that the court has the power to grant a remedy by way of security for costs against the funder, the court has the power first to make an order requiring the claimant to disclose the identity of the funder, and this power is ancillary to and necessary to make effective the primary power to order security.

Recent Developments - Security For Costs

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.

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