A claimant can, on the whole, choose whether to commence proceedings (and incur the costs of doing so) or not. A defendant, once served with proceedings, has no such freedom of choice. Unless it admits the claim, the defendant is forced to defend and incur costs in doing so. If it successfully defends the proceedings a defendant wants to ensure that it can recover its legal costs of doing so. Where, for example, a claimant is impecunious, or out of the jurisdiction, an application for security for costs may be a way of helping to achieve this. Tactically, it can also be a useful weapon for heading off litigation by focusing a claimant's mind on the merits, and costs, of its case, and so can achieve much more than just securing costs.
What is an order for security for costs?
It is an order requiring a party to pay money into court, or to provide a bond or guarantee or an insurance policy as security for their opponent's costs of the proceedings or a part of the proceedings.
How do you apply for security for costs?
Application for security is made pursuant to Civil Procedure Rule 25.12 (CPR 25.12). An application can only be made once proceedings have been commenced and should be made promptly and as early in the proceedings as possible.
Who can apply for security for costs?
Generally speaking, it is those in the position of a defendant in litigation that can apply for security so:
- A defendant against a claimant;
- A claimant facing a counterclaim, so long as it is a free standing counterclaim and not, in substance, merely a defence to the original claim; or
- A respondent against an appellant in appeal proceedings.
It should also be noted that a defendant can apply for security against a non-party to the proceedings such as a third party funder (CPR 25.14).
What are the grounds for applying for security?
An application can be made if one of the six grounds set out in CPR 25.13 is satisfied:
- The claimant (whether an individual or company) is resident outside the jurisdiction and is not resident in one of the countries covered by the various regulations and conventions referred to in CPR 25.13 (2) - so the EU and a number of other countries;
- The claimant is a company or body 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 address since issuing the claim with the intention of evading the consequences of the litigation;
- The claimant has failed to give its address in the claim form or has given an incorrect address;
- The claimant is acting as a nominal claimant and there is reason to believe it will not be able to pay the costs if ordered to do so; or
- The claimant has dealt with its assets so as to make enforcement of an order for costs difficult to enforce against it.
If one of the grounds is met will security automatically be ordered?
Not necessarily. There is a two stage test set out in CPR 25.14 so that:
- One of the conditions set out above must be satisfied; and
- The court must be satisfied that it is just to order security in all of the circumstances of the case.
What does the court take into account when exercising its discretion?
Although the prospects of success are relevant, the court, when considering if it is just to make an order, should not consider the merits of the case in any great detail and should certainly not conduct a mini-trial in determining the application. What it will consider are, amongst other things:
- The relevant ground applied under - including, if the relevant ground is the claimant's financial position, whether that position was caused by the defendant;
- The likelihood of the claim succeeding - if there is clearly no defence to the action, the court will not order security as the defendant is unlikely to achieve a costs order in its favour;
- The ability to comply with any order made - the court will be particularly keen to ensure that where a claim does have a good chance of success, an application for an order for security is not used as an instrument of oppression so as to stifle a serious and genuine claim. The court will expect a claimant to consider raising money from other sources to provide the security if ordered. The claimant will need to provide evidence of the steps it has taken to raise funds and that, if it has been unable to do so, the claim will be stifled if an order is made. Simply saying it cannot raise the funds will not suffice. The court can, if it considers the claim could be stifled, order a smaller sum to be secured than it would otherwise have done;
- Delay in applying - any delay should be explained and if an application is made just before trial or on an appeal, the court will need to be convinced that it is not an oppressive tactical application; and
- The parties' conduct - the claimant's conduct in dealing with its assets to avoid enforcement is a relevant ground for applying for security and should be clearly evidenced in the application as should a claimant's conduct in increasing the costs of the claim or failing to comply with a previous costs order (payment generally has to be made within 14 days of an order) either in the current proceedings or other related proceedings. Failure by a defendant to engage in mediation or to follow a contractual dispute resolution clause designed to avoid litigation could lead to the court refusing security.
What level of security might be awarded?
The amount of security ordered must be proportionate and not oppressive. Determining the amount is not an exact science. The court takes into account the costs already incurred and to be incurred, and the defendant must produce evidence of this. It will also consider if a trial is imminent as it may be deemed disproportionate to order substantial security at such a late date. Security is not usually given on an indemnity basis so not all of a defendant's costs will be secured.
It should be noted that where the application is made on the basis that the claimant is not resident within the jurisdiction or within one of the countries referred to in CPR 25.13 (2), this does not give rise to an inflexible assumption that security should be provided. The court will consider how easy it would be for a defendant to enforce any award of costs and may order security by reference to:
- Any additional costs or extra burden that will be imposed in enforcing the costs judgment when compared to enforcing it within the jurisdiction; or
- The full amount of the costs where the evidence indicates there would be substantial obstacles or difficulties sufficient to create a real risk of non-enforcement.
What form can security for costs take?
Security can take a number of forms:
- Payment of money into court or to a solicitor to be held on specified terms;
- Bank bonds;
- Parent company or bank guarantees; or
- An insurance policy. An appropriately worded after the event (ATE) insurance policy that gives the defendant sufficient protection can amount to adequate security for the defendant's costs. A defendant would need to be reassured that the amount of costs insured is sufficient and that there are robust anti-avoidance provisions so that the ATE insurance cannot subsequently be rendered worthless. Sometimes an ATE insurer will (at a cost) provide a direct deed of indemnity to the defendant to satisfy these concerns.
What happens if security is ordered but not provided?
An order for security should state the date when security is to be given and the proceedings will often be stayed pending security being provided. It should also state what is to happen on default which is generally that the claim is struck out. If no such provision is made, the defendant can apply to have the claim struck out if security is not given.
Points to consider
- The court has implied powers to order a claimant to disclose to the defendant the details of any third parties funding the claim so that an order for security can be sought against them.
- Security is often granted by reference to stages in the proceedings: fresh applications may be made for the costs of subsequent stages.
- A properly worded ATE insurance policy can defeat an application for security if it provides sufficient protection and cannot be avoided.
- The court is live to oppressive applications and good claims being stifled by more prosperous defendants.
- Following an unsuccessful application for security, a further application can only be made if there is a significant or relevant change in circumstances.
- For claims proceeding in the Commercial Court, the court will often make an order for security conditional on the defendant undertaking to compensate the claimant, if the claimant wins the case, against losses suffered as a result of having its funds tied up.
- Any party can seek security for costs in a number of other situations, such as where a party has failed to comply with a rule, practice direction or pre-action protocol, or as a condition for continuing to bring proceedings following a summary judgment or strike out application.
Need more advice or guidance on construction disputes? Contact construction partner Ashley Pigott or a member of our Dispute Resolution team.