There have been a number of recent cases in relation to security for costs.
ATE insurance; shareholder funding
In Lewis Thermal Ltd v Cleveland Cable Company Ltd, the Technology and Construction Court, part of the Business and Property Courts (B&PCs), ordered a dormant claimant company to provide security for the defendant’s costs in proceedings for breach of contract and fraudulent misrepresentation.
The case shows the difficulty of relying on after-the-event (ATE) insurance as security for costs and also is an example of the court taking into account the possibility of shareholder funding when deciding whether to order security against an impecunious company.
Here the claimant had taken an assignment of the claim from an electrical cabling installer shortly before the installer went into liquidation and the defendant had allegedly supplied defective cabling to the installer damaging the installer’s reputation and causing loss of business valued by the claimant at £8 million.
The claimant sought to rely on its ATE policy and the court accepted that it could, in principle, answer a security application (see Premier Motor Auctions Ltd v PwC and Harlequin Property (SVG) Ltd v Wilkins Kennedy).
However, ATE insurance was not adequate security where, for example, there was a risk of the claimant’s insolvency and no guarantee from the insurer to the defendant, and an exclusion of the Contracts (Rights of Third Parties) Act 1999 (see Harlequin above).
Neither was ATE insurance adequate security when there was a risk of the insurer avoiding the policy (see Catalyst Managerial Services v Libya Africa Investment Portfolio).
Here the claimant’s ATE policy did not give the defendant direct rights against the insurer and it excluded the Contracts (Rights of Third Parties) Act 1999 and also contained other exclusions.
The court held that these were real and not fanciful risks and there was reason to believe that the claimant would be unable, either itself or through its ATE insurance, to pay the defendant’s costs if ordered to do so.
The court also took into account the fact the claimant’s shareholders, who had apparently already agreed to fund disbursements in the action, had funds available for security.
Subsequently the court varied the security order and allowed security to be provided by a deed of indemnity from the claimant’s ATE insurers for the full amount of the defendant’s budgeted costs.
Security for costs on indemnity basis
In Danilina v Chernukhin and others, the Commercial Court, also part of the B&PCs, ordered the claimant to pay further security to three defendants being 75% of incurred and expected costs, as there was a reasonable possibility of indemnity costs being ordered if the claimant lost, accepting the defendants’ argument that if the claimant lost at trial, it was highly likely that she would be ordered to pay indemnity costs, on the basis that she knowingly gave false evidence, as, on the facts, there was no room for mistaken recollection.
In the absence of a possible indemnity costs order, security was generally ordered by reference to 60%-70% of incurred and expected costs. This did not involve considering the merits of the claimant’s claims, it assumed she lost them. The court held that if this happened, it was likely to be because the claimant was dishonest.
The first defendant was also involved in an arbitration with a third party which raised the same issue as one of the claimant’s claims. The court held that the apportionment of the defendants’ future costs 65% to the claim and 35% to the arbitration was a reasonable possibility, so could be used for the purpose of the security order.
The claimant was unable to establish that her claim would be stifled if she was ordered to pay the level of security sought. The third party had already provided funds to the claimant and made it clear that he wished her to pursue and win the proceedings. The claimant’s statement that the third party had not agreed to provide further security was not “full, frank, clear and unequivocal evidence” that he was not willing or able to provide the security sought.
Although the claimant was being asked to provide security at a late stage, two months before trial, this did not justify declining to make the order, particularly as there was no evidence that providing the security would be burdensome to the third party.
Additional security for costs
In Mayr v CMS Cameron McKenna Nabarro Olswang LLP, the Commercial Court dealt with the principles to be applied when a party makes a second application for security for costs, that is an application for additional security.
This was a claim for professional negligence and in November 2017 the parties agreed that the claimant should provide security for costs in instalments. The defendant then made an application for additional security of £1.45 million.
The court pointed out that case law shows that a party cannot seek additional security purely because the original amount sought was now inadequate; in other words they could not have a second bite at the cherry. However if there had been a material change of circumstances, then a party could seek additional security.
Here the claimants conceded that there had been a change in circumstances, but stated that it did not warrant the level of additional security being sought.
The court said that if there was doubt about the reasonableness of the figures then that doubt should be resolved in favour of the defendant as the prejudice to the defendant of risking being unable to recover its costs outweighed the prejudice to the claimant.
On the facts, the court made an order for further security in the sum of £1.3 million.
The court also said that on an application for security for costs it should adopt a broad-brush approach and not “descend into the level of detail which will be examined on a detailed assessment…”
“The question is, what amount is it just to order to protect the defendant from a costs order which the claimant is unable to pay? It is a two stage test and to introduce a limit confining the increase in security to only those items which arise from a change in circumstances is not warranted.
The overall purpose of giving security for costs is to protect the defendant and that purposes can only be achieved if the court considers the overall figures on the basis of the up to date estimate before the court.”
Do not delay
In Accident Exchange Ltd and another v McLean and others, the Commercial Court granted the application for security for costs, but significantly reduced the amount ordered in respect of incurred costs due to the solicitors’ delay in making the application.
The decision highlights the importance of defendants taking proactive steps to monitor the claimants’ financial position to ensure that any anticipated improvement in that position which has caused the defendant to hold off from seeking security has, in fact, come to fruition.
The claimants’ case on delay originated from events in October 2016, when the claimants’ then solicitors had stated in correspondence that the claimants had completed, subject to shareholder approval, a refinancing which would strengthen the claimant’s financial position. Consequently, the defendant solicitors decided not to pursue security at that time. However, the refinancing was not approved, and the defendant solicitors did not make further enquiries until early 2018.
The claimant contended that there was culpable delay between around November 2016 and January 2018 because:
- A prudent solicitor would have immediately asked for details of when shareholder approval was to be given.
- The defendant solicitors should have kept the matter under review, for example by inspecting the claimants’ accounts in March 2017, which would have revealed that approval had not been obtained.
The court noted that this was a major piece of litigation, involving very substantial costs (the defendant solicitors’ total costs to the end of trial were estimated at £19 million). Consequently, one would have expected the defendant solicitors to pursue the matter and, had they done so, it was very likely that the lack of shareholder approval would have emerged. Even if the claimant had suggested that the security application should await completion of refinancing negotiations, having regard to the date for trial, it would probably have been made earlier than it was.
On quantum, the judge noted that the defendant solicitors sought security for 80% of their costs. He referred to Stokors SA v IG Markets Ltd, in which the Court of Appeal supported the view that around 60% was appropriate. Having regard to this and to the solicitors’ delay, he ordered “60 per cent of 60 per cent” of the incurred costs. In relation to costs to be incurred, he ordered 60% of the costs claimed.
