It is well known that, where a claiming party is a limited company, under section 726(1) of the 1985 Companies Act1, if it appears by credible testimony that there is a reasonable belief that the company will be unable to pay the defending party's costs if its claim fails, then it may be required to provide security for the defending party's costs.
Mr Justice Coulson in the case of Lobster Group Ltd v Heidelberg Graphic Equipment Ltd & Anr [2008] EWHC 413 (TCC) was asked to consider whether a party seeking security for costs can include within those costs, the costs of a pre-action activities including mediation.
The dispute between the parties related to the purchase of an alleged defective printing press. In January 2005, a mediation took place which failed to produce a settlement. Over two years later, in May 2007, proceedings were issued. As the claimant, Lobster, had been placed in administration, it was agreed that it was appropriate to provide security. However the amount of that security was not agreed. There was a difference in approach between the two defendants. The second defendant sought security up until the exchange of witness statements in the agreed sum of £37k. The first defendant, Heidelberg, sought in the region of £160k. The reason for this difference was that, sought to recover security in respect of the costs incurred during the pre action proceedings.
Mr Justice Coulson noted that, as a matter of principle, the costs incurred by a party prior to commencement of litigation proceedings can be recovered as costs. Following the case of McGlinn v Waltham Contractors [2005] 3 All ER, that is provided those costs could be said to be either the costs of or costs incidental to the proceedings. Lobster put forward four reasons as to why the application for security in respect of the pre action costs was misconceived:
- a considerable part of the pre-action costs were incurred in relation to the mediation and the costs related to the mediation were not recoverable in these proceedings in any event;
- a large proportion of those costs were incurred before the administration, so that any order for security would be an unfair preference;
- to the extent that the security ordered was in respect of pre-action costs, Lobster would be unable to obtain "After The Event" insurance or, if they did so, would have to pay prohibitive premiums. Therefore a genuine claim would be "stifled"; and
- the length of the pre-action period was such that these costs should not form the subject of an order for security.
Of these points the Judge thought that the first and fourth were the most important in this case. The mediation was carried out under the CEDR model form and the parties had, in the usual way, agreed to bear their own costs and share the costs of the mediator. Accordingly, the Judge was firmly of the view that mediation costs should not form part of the security ordered. The only way in which such costs would be recoverable would be if the parties had agreed that the specific costs could be the subject of any subsequent application.
In relation to the preference, the Judge did not give a concluded view, saying it was only of minor relevance to the application. It was an argument available to Lobster and one which the Judge had to bear in mind. In relation to the insurance issue, this would be dependent on it being impossible for Lobster to obtain the actual insurance. There was no such evidence before the court.
The Judge did take into account the delay. He thought that a court would be slow to exercise its discretion to award security in respect of costs incurred two years before proceedings were commenced. The longer the delay between the incurring of the pre-action cost and the application for security based on that item of cost, the more reluctant the court would be to make such an order. Here, the pre-action period was very prolonged covering a period from the mediation to proceedings of nearly two and a half years. The Judge said he would be very reluctant to decide that after all this time, Lobster should provide security to Heidelberg for the costs incurred during this period. That would be "unnecessarily draconian".
Conclusion
The Judge disallowed the pre-action costs incurred by Heidelberg. The main reason for this was that a large proportion of the costs related to the mediation, the secondary factor was the large gap in time. However Lobster was required to provide suitable security up to the exchange of witness statements in the sum of £70k, being £50k to reflect the period from the application to the exchange of witness statements and an assessed figure of £20k to reflect the costs incurred from the commencement of the proceedings to the making the application for security for costs.
Some concern has been expressed about the costs parties are required to incur as a consequence of the requirements of the various pre action protocols. Where, companies are bringing claims, and there are legitimate question marks about their ability to repay any costs that may be awarded against them, then following this judgment, those defending such claims would be well advised to consider including their pre action costs in any application they may bring for security for costs.
This article is based on an extract from a forthcoming issue of the Fenwick Elliott Dispatch, a monthly newsletter which summarises recent key developments relating to contentious and non-contentious construction law issues. To see the current issue please visit www.fenwickelliott.co.uk.
Footnote
1 There is talk that section 726 will be repealed by October 2008. However, in practise this will make little difference as a court will still be able to order a company to provide security by virtue of CPR 25.13(2)(c), which has a very similar wording to s726.
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