Overview
Security for costs is a procedural mechanism in civil litigation that permits a defendant to request that the claimant provides financial security for the defendant's legal costs, in the event that the claimant's case is unsuccessful. This provision aims to protect defendants from claimants who may be unable or unwilling to satisfy cost orders made against them. The legal basis for security for costs is primarily found in the Civil Procedure Rules (CPR) Part 25 and Section 1134 of the Companies Act 2006. The key principles involve the court's discretion, balancing the protection of defendants against potential injustice to claimants, and the specific conditions under which security may be granted. Understanding the requirements and application of this mechanism is fundamental for effectively managing civil litigation.
Legal Framework and Principles
Statutory Basis
The statutory structure for security for costs is established by CPR Part 25 and Section 1134 of the Companies Act 2006. Under CPR 25.12, the court may order a claimant to give security for the defendant's costs if it is satisfied, having regard to all the circumstances of the case, that it is just to make such an order.
Grounds for Ordering Security
Circumstances that may warrant an order for security for costs include:
-
The claimant is resident out of the jurisdiction but not in a Brussels Contracting State, a State bound by the Lugano Convention, or a Regulation State as defined under the Civil Jurisdiction and Judgments Act 1982.
-
The claimant is a company or other body and there is reason to believe it will be unable to pay the defendant's costs if ordered to do so.
-
The claimant has changed address since the claim was commenced with a view to evading the consequences of the litigation.
-
The claimant failed to give a correct address on the claim form.
-
The claimant is acting as a nominal claimant, and there is reason to believe they will be unable to pay the defendant's costs.
-
The claimant has taken steps in relation to their assets that would make it difficult to enforce an order for costs against them.
Core Principles
Several important principles govern the mechanism of security for costs:
-
Access to Justice: The court must balance the defendant's right to protection against unmeritorious claims with the claimant's right to pursue a legitimate claim.
-
Proportionality: Any security ordered should be proportionate to the potential costs and not used oppressively.
-
Judicial Discretion: The court has wide discretion in deciding whether to order security and in what amount, considering all relevant circumstances.
-
Timeliness: Applications for security should be made promptly to avoid unnecessary delays and expenses.
Conditions for Granting Security
Claimant's Residence Outside the Jurisdiction
A claimant's residence outside the jurisdiction may prompt the court to order security for costs due to potential difficulties in enforcing cost orders abroad. The impact of Brexit has changed the environment of reciprocal enforcement of judgments between the UK and EU member states, requiring careful consideration of current international agreements and enforcement mechanisms.
Case Study: Nasser v United Bank of Kuwait [2001]
In Nasser, the Court of Appeal emphasized that foreign residence alone is insufficient to justify an order for security. The court must assess the actual difficulties in enforcing a costs order in the claimant's country of residence and consider whether any bilateral or multilateral agreements facilitate enforcement.
Financial Difficulty of the Claimant Company
If there is reason to believe that a claimant company will be unable to pay the defendant's costs if ordered to do so, the court may order security. This assessment involves scrutinizing the company's financial statements, cash flow, and ongoing business operations.
Asset Concealment or Disposal
Evidence that the claimant is concealing or disposing of assets to avoid enforcement of a potential costs order can justify the granting of security. The court requires robust evidence and a comprehensive factual analysis to support such allegations.
Judicial Discretion and Procedural Aspects
Exercising Judicial Discretion
While the court's discretion in ordering security for costs is broad, it must be exercised judicially, taking into account all relevant factors. These factors include:
-
Strength of the Claim: The court may consider the merits of the claim, although a detailed assessment is generally avoided at this stage.
-
Impact on the Claimant: Ordering security should not stifle a genuine claim. The court considers whether the claimant would be prevented from proceeding due to inability to provide security.
-
Conduct of the Parties: Any conduct by the defendant that has contributed to the claimant's financial difficulty may be relevant.
-
Delay in Application: Timeliness is important. A delayed application may be refused if it causes unnecessary prejudice to the claimant.
Analogy: Balancing the Scales
Exercising judicial discretion in this context is akin to balancing scales, ensuring that neither party is unfairly disadvantaged. The court must weigh the defendant's need for protection against the possibility of unjustly barring a legitimate claim.
Case Example: Sarpd Oil International Ltd v Addax Energy SA [2016]
In this case, the Court of Appeal highlighted the significance of timely applications. A significant delay in seeking security for costs may lead the court to refuse the application, emphasizing that justice requires promptness to avoid prejudicing the claimant.
Procedure for Obtaining Security
-
Initial Request: The defendant typically first requests the claimant to provide security voluntarily, allowing a reasonable time for compliance.
-
Formal Application: If the claimant refuses or fails to respond, the defendant may apply to the court under CPR Part 25, providing the grounds for security.
-
Supporting Evidence: The application must be supported by evidence, including witness statements outlining the reasons for seeking security and any relevant financial information about the claimant.
-
Court Hearing: The court may hold an oral hearing to consider the application, though in straightforward cases it may decide based on written submissions.
-
Court Order: If the court grants the order, it specifies the form and amount of security required and sets deadlines for compliance. Non-compliance by the claimant may result in a stay or dismissal of the proceedings.
Strategic Considerations
Tactical Use of Security Applications
Applications for security for costs can serve strategic purposes in litigation:
-
Assessing Claimant Commitment: Requiring security may test the claimant's dedication to pursuing the claim and reveal any hidden financial backers.
-
Encouraging Settlement: The additional burden of providing security might encourage a claimant to consider settlement options.
-
Obtaining Financial Disclosure: The process can compel the claimant to disclose financial information, giving a view into their ability to satisfy potential cost orders.
Responding to Security Applications
Claimants opposing security applications may argue:
-
Access to Justice: That ordering security would unjustly hinder their ability to pursue a valid claim.
-
Defendant's Conduct: If the defendant's actions contributed to the claimant's financial difficulties, the court may be less inclined to grant security.
-
Alternative Security: Proposing alternative forms of security, such as bank guarantees or third-party indemnities, may address the defendant's concerns without imposing undue hardship on the claimant.
Practical Example: International Business Dispute
Consider a scenario where a UK manufacturer is sued by a foreign supplier alleging breach of contract. The supplier, based outside the UK, has limited assets within the jurisdiction and faces financial instability due to market fluctuations.
-
The defendant applies for security for costs based on the claimant's foreign residence and doubtful financial capacity.
-
The court must consider the enforceability of a costs order in the claimant's home country, the genuine nature of the claim, and the potential impact on the claimant's ability to proceed if security is ordered.
This example illustrates how multiple factors interact, requiring the court to exercise discretion carefully to achieve a just outcome.
Application in Practice
Understanding security for costs is necessary across various aspects of civil litigation:
-
Litigation Strategy: Anticipating and preparing for security applications can influence case management and resource allocation.
-
Client Advising: Lawyers must advise clients on the risks and implications of security for costs, including the potential for such applications and strategies for responding.
-
Negotiations and Settlements: The prospect of a security order may affect negotiations, as parties reassess the risks and costs associated with continuing litigation.
Conclusion
Security for costs represents a complex interplay of procedural rules, strategic considerations, and judicial discretion within civil litigation. When multiple factors converge—such as a claimant's foreign residence, financial instability, and potential enforcement difficulties—the court must meticulously consider these issues. The statutory provisions of CPR Part 25 and Section 1134 of the Companies Act 2006 set out the grounds and procedures for obtaining security, while case law provides guidance on the exercise of judicial discretion.
The interaction of principles such as access to justice, proportionality, and the need for timely applications requires careful consideration. Technical examples like Nasser v United Bank of Kuwait and Sarpd Oil International Ltd v Addax Energy SA demonstrate how courts balance the protection of defendants with the rights of claimants.
Effective engagement with security for costs demands precise adherence to procedural requirements, combined with a solid understanding of the main legal principles. By appreciating how these concepts interrelate, legal practitioners can manage this area adeptly, ensuring that the interests of justice are served in civil litigation.
