Costs - Security for Costs

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Overview

Security for costs is a procedural tool in civil litigation designed to protect defendants from financial risk when claims are made by parties who might not cover costs if required. For those preparing for the SQE1 FLK1 exam, it's important to understand this concept as it addresses essential aspects of civil procedure, access to justice, and court discretion. This article explores security for costs, providing vital knowledge for comprehending and applying this area of law in exams and practice.

Legal Framework and Principles

The authority for security for costs comes from Section 1134 of the Companies Act 2006 and Part 25 of the Civil Procedure Rules (CPR). Under CPR 25.12, security for costs may be ordered if:

  1. The claimant is based outside the jurisdiction, excluding Brussels or Lugano Convention states.
  2. The claimant is a business entity unlikely to cover costs if required.
  3. Address changes have been made to avoid litigation consequences.
  4. Assets are being concealed or disposed of.
  5. The claimant is nominal and unable to pay costs.

Main Principles

The security for costs mechanism relies on several principles:

  1. Access to Justice: Balancing the protection of the defendant with the claimant's right to pursue claims.
  2. Proportionality: Security must be reasonable relative to potential costs.
  3. Judicial Discretion: Courts have broad discretion on whether to order security and in what amount.
  4. Timing: Applications should be timely to prevent unnecessary expenses or delays.

Key Conditions for Granting Security

Non-EU Residence

Security may be ordered if the claimant resides outside the EU, complicating enforcement of cost orders. Post-Brexit complexities require candidates to understand current reciprocal agreements.

Case Study: Nasser v United Bank of Kuwait [2001]

Here, the Court of Appeal noted foreign residence alone doesn't justify security orders. The likelihood of substantial enforcement obstacles must be considered, highlighting the need for careful evaluation.

Financial Instability

For companies, security is possible if there's a belief they can't pay costs. This involves examining:

  • Balance sheet health
  • Cash flow
  • Recent financials
  • Ongoing operations

Asset Concealment

Security may be warranted if the claimant hides or disposes of assets, requiring strong evidence and thorough factual analysis.

Judicial Discretion and Procedural Aspects

Exercising Discretion

While discretion is wide, it's not unchecked. Considerations include:

  1. Claim strength
  2. Order impact on the claimant's pursuit ability
  3. Defendant's role in claimant's financial state
  4. Application timing

Case Example: Sarpd Oil International Ltd v Addax Energy SA [2016]

This case demonstrates the importance of timing, with the Court of Appeal stressing prompt applications and noting delay as a refusal factor.

Procedure for Obtaining Security

  1. Initial Request: Ask the claimant for security, allowing them time to respond.

  2. Formal Application: If denied, apply to the court with evidence for security.

  3. Evidence Requirements: Include:

    • Witness statements outlining grounds
    • Cost estimates
    • Relevant claimant financial details

  4. Court Hearing: Generally heard orally, though simple cases may be resolved on paper.

  5. Order Compliance: If approved, security details and deadlines are set. Non-compliance can pause or end a claim.

Strategic Considerations

Tactical Use

Security applications offer strategic opportunities:

  1. Testing Claimant Resolve: May lead to settlements or reveal financial backing.
  2. Proceedings Delay: Though not optimal, can be used to slow claims.
  3. Disclosure of Information: Forces claimants to share financial details.

Response Strategies

Claimants opposing security should consider:

  1. Access to Justice: Arguing it blocks genuine claims.
  2. Causation Argument: Showing financial woes result from the defendant.
  3. Alternative Security: Suggesting other security forms, like insurance or third-party funding.

Practical Example: Tech Startup vs. Established Provider

Consider a UK provider facing a breach claim from a foreign startup. With significant investment but low cash flow:

  • The defendant may seek security due to non-EU residence and financial instability.
  • The court would weigh:
    1. The startup's cost-covering ability
    2. Impact on pursuing the claim
    3. Claim validity and potential outcome
    4. Availability of third-party funding

This highlights the mix of legal principles, commercial realities, and strategy in security applications.

Application in Practice

Understanding security for costs is vital across legal fields:

  1. Litigation Strategy: Important for evaluating financial risks and case challenges.
  2. Client Advice: Lawyers must clearly explain security orders' consequences and mitigation strategies.
  3. Negotiations: Security considerations heavily influence settlement talks and bargaining power.

Conclusion

Security for costs is a complex aspect of civil procedure requiring a solid comprehension of legal rules and practical effects. For SQE1 FLK1 candidates, proficiency in this topic involves:

  1. Learning the legal basis and conditions for security orders
  2. Evaluating court discretion and influencing factors
  3. Recognizing security's strategic role in litigation
  4. Balancing defendant protection with access to justice
  5. Applying this knowledge thoughtfully in challenging scenarios

By achieving these elements, candidates will be well-prepared for the exam and future practice, confidently handling civil litigation challenges.