The following LCC guide explores security for costs and the key concepts involved.
What is a security for costs order?
A security for costs order requires a claimant to pay money into court or provide a bond as security for a defendant’s costs. Importantly, if a security for costs order is made, a claimant will not be permitted to continue their claim until the order is complied with. It is a useful mechanism which can focus a claimant’s mind on the merits of their case, potentially encouraging an early settlement or an end to a vexatious claim. This can provide peace of mind for a defendant that they will not be required to defend proceedings with no real prospect of recovering their costs even if they are successful.
Who can apply for security for costs?
Any claim defendant may apply for security for costs; including a claimant faced with a counterclaim or who becomes a respondent on an appeal[1].
How to apply for security for costs
It is usually best practice to write to a claimant directly in the first instance requesting that security be provided voluntarily. If they refuse (whether actively or by not responding), a defendant may then make an application to the Court within the existing claim proceedings. Whilst security for costs may be requested at any time in the proceedings, it is recommended that a defendant seeks to submit an application promptly once the facts justifying the order are known. A claimant may choose to do so prior to service of the defence, which could be a tactical decision to apply pressure in the early stages towards an impecunious claimant[2], however submitting an application once the defence is served is most common. If the defendant delays submitting the application and thus incurs high costs, the claimant could argue that the defendant's concern about the costs was disingenuous.
An application includes the application notice, draft order, and evidence (in the form of a witness statement) which is submitted to the Court.
What are the grounds for application?
The Court may make an order for security for costs if two conditions are met:
- It is just to do so, having considered all the circumstances of the case, and
- One or more of the conditions in CPR r.23.13(2) is satisfied, or an enactment permits the Court to require security for costs.
Security cannot be ordered solely because one or more of the conditions in CPR r.25.13(2) is satisfied. It can only be ordered if, having regard to all the circumstances of the case, the Court is satisfied that it is just to do so.[3] The Court’s discretion in this regard is broad, and appropriate consideration will be given to whether making such an order would be consistent with the overriding objective. and the Court will also seek to ensure that the application is not simply being used tactically to hinder a genuine claim.
CRP r.25.13(2) sets out the following conditions:
- The claimant is resident out of the jurisdiction.
- 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 defendant must provide evidence to show the claimant will be unable to pay when the costs become due[4]. This could include, for example, evidence of liquidation[5], outstanding insolvency petitions, failure to comply with previous costs orders, poor credit ratings, or copies of company accounts indicating financial difficulty.[6]
- The claimant has changed their address since the claim was commenced with a view to evading the consequences of the litigation.
- The defendant must prove that the address change was motivated by an intention to avoid a potential costs order, rather than being the result of unrelated personal or commercial circumstances[7].
- The claimant failed to provide an address in the claim form or gave an incorrect address.
- Failure to include a proper address on a claim form is not, by itself, sufficient. If the claimant’s address is available elsewhere in documentation, or the defendant fails to take action to request the correct address, the Court may not be satisfied that this condition is met.[8]
- The claimant is acting as a nominal claimant, other than as a representative claimant under Part 19, and there is reason to believe they will be unable to pay the defendant’s costs if ordered to do so.
- The claimant has taken steps in relation to their assets that would make it difficult to enforce a costs order.
- This condition applies to both individual and corporate claimants[9], and requires the defendant to demonstrate that the claimant has taken positive steps in relation to their assets[10].
A possibility of such action is not sufficient and there must be actual steps taken[11]. This could include the dissipation of assets, the transfer of assets overseas or into the names of third parties, or the transfer or removal of assets to places unknown to the defendant[12]. The defendant does not need to prove the claimant acted with the specific intention of evading a costs order[13]; it is not necessary for the steps to have been taken solely in contemplation of litigation. If a claimant asserts that they have no assets, the Court may draw inferences from their conduct to assess if they possess any undisclosed assets[14].
- This condition applies to both individual and corporate claimants[9], and requires the defendant to demonstrate that the claimant has taken positive steps in relation to their assets[10].
Where a claimant refuses to provide any evidence of their financial position, and there is no legitimate reason for their reticence, the Court may be willing to infer that the claimant is unlikely to satisfy an adverse costs order. A corporate claimant cannot rely on “confidentiality”[15] or “business reasons”[16] as a legitimate justification for withholding financial information, as the Court may make appropriate arrangements to prevent sensitive material from being disclosed publicly.
How much will the Court award?
The Court has extensive discretion regarding the amount of security to be provided. In determining the amount to be provided, the Court will consider the costs already incurred by the defendant and those likely to be incurred in future.
Security for costs in arbitration
Whilst outside the scope of this guide, under s.38(3) of the English Arbitration Act 1996, tribunals in England and Wales have the power to require a party to provide security for costs. The LMAA Terms 2021 expressly stipulate that a party may make an application to the Tribunal for security for costs and, if the Tribunal agrees that the test has been met, then the Tribunal is empowered to order that a claimant put up security.
If a party fails to comply with the Tribunal’s order for security for costs, there is a risk the claim will be stayed or even dismissed entirely. The Tribunal has ample discretion to grant and/or determine the amount and form of the security, and it features recommended security templates on its website.
Whilst specific grounds on which an application can be made are not set out within the LMAA Terms, s38 of the Arbitration Act states that a Tribunal shall not exercise its power on the grounds that the claimant is an individual ordinarily resident, or a corporation whose management and control is, outside the United Kingdom.
Parties will often adopt similar grounds to those set out under the CPR as the basis for their applications.
Conclusion
It is strongly recommended that at an early stage in litigation, all defendants consider whether an application for security for costs is appropriate and whether it is likely to be successful. It can be useful in deterring progress of spurious claims and can provide reassurance to defendants that they will not be left out of pocket in instances where they have successfully defended a claim.
Our Members are reminded that if they are concerned about a legal issue arising out of the points discussed in this article, they may be entitled to some initial legal advice free of charge, from a select panel of external lawyers under the Club’s Legal Advice Benefit. If Members wish to take advantage of this benefit, please contact the Claims team to discuss.
[1] CPR r. 25.15
[2] Brainbox Digital Ltd v Backboard Media GMBH [2017] EWHC 2465 (QB)
[3] Infinity Distribution Ltd (In Administration) v Khan Partnership LLP [2021] EWCA Civ 565; [2021] 1 W.L.R. 4630
[4] Re Unisoft Group (No 2) [1993] BCLC 532
[5] Northampton Coal, Iron & Waggon Company v Midland Waggon Company (1878) 7 Ch D 500
[6] Eagle Ltd v Falcon Ltd [2012] EWHC 2261 (TCC)
[7] Lederer and others v The Persons Listed At Schedule 1 and others [2019] EWHC 554 (Ch)
[8] Beriwala v Woodstone Properties (Birmingham) Ltd and another [2021] EWHC 6 (Ch)
[9] Harris v Wallis [2006] EWHC 630 (Ch)
[10] Tulip Trading Ltd v Bitcoin Association for BSV [2022] EWHC 2 (Ch)
[11] Chandler v Brown [2001] All ER 302
[12] White Book 2021, Vol. 1 at para 25.13.18
[13] Aoun v Bahri & Angelou [2002] EWHC 29
[14] Dubai Islamic Bank PJSC v PSI Energy Holding Co BSC and others [2011] EWCA Civ 761
[15] Robert Tchenguiz & another v Grant Thornton UK LLP & others ([2015] EWHC 3209 (Comm)
[16] SARPD Oil International Ltd v Addax Energy SA & another [2016] EWCA Civ 120