One way of mitigating your client’s cost risk in litigation it is defending is to consider making an application for security for costs.
The Civil Procedure Rules (CPR) are clear as to what must be satisfied for an order to be made, being:
- That the court is satisfied, having regard to all the circumstances of the case, that it is just to make an order.
- One or more of the conditions at CPR 25.13(2) applies or an enactment permits the court to require security for costs.
Deciding which of the CPR conditions your client has the best chance of satisfying is relatively straightforward. That said, what the court will deem relevant is often difficult to predict.
One point for an applicant to consider is whether the respondent has legal expenses insurance; if they do, this can constitute security. In the case of Catalyst v Libya Africa Investment Portfolio the claimant was ordered to pay security for the defendant’s costs by way of an after the event (ATE) insurance policy “in reasonably satisfactory form”. The court examined what a “reasonably satisfactory form” constituted and found that merely having an ATE policy in place was not sufficient, identifying two risks in the policy as reasons for this. The first was the risk of insolvency and the fact that the proceeds of the policy may have had to have been paid to creditors of the company and therefore not available for payment of any costs awarded to the defendant. The second was the risk of avoidance by the insurer. Reading the transcript of this case, this second reason seemed very case specific and to be treated with caution. However, unless or until it is appealed, the case remains valid law (I understand that this case is subject to an application for permission to appeal).
Conditions
Finding the appropriate CPR condition which applies is the first stage to bringing a successful application. Reading the White Book commentary on the conditions provides a helpful summary of what is required. As to how the courts interpret the applicability of each of these conditions, this is where the crystal-ball gazing begins!
Probably the most commonly used ground is where a claimant is a company or other body and there is reason to believe that it will be unable to pay the defendant’s costs if ordered to do so. Often, this will be an exercise in the interpretation of the company’s accounts.
Sometimes, the courts will look further. In Endeavour Energy v Hess, the court declined to order security for costs even when the threshold for granting security had been satisfied and the court itself was of the opinion that, in principle, security should be ordered. In this case, the claimant was balance-sheet insolvent, so the court was satisfied that it would not be able to meet its debts when an order for costs was made against it. Nevertheless, the court still refused to order security and took the view that the defendant already held sufficient security via a previously issued letter of credit.
Another condition is similar to the above, but applies only in respect of “nominal claimants”. The meaning of “nominal claimant” has been recently summarised in the case of Chuku v Chuku: broadly, there should be some element of duplicity or window-dressing for a person to be considered a nominal claimant. Whilst the applicant is only required to demonstrate that there is reason to believe the claimant would not be able to meet its debts when an order for costs was made against it, under this condition, if insolvency can be demonstrated, the likelihood of a successful application is increased.
Strategy
As well as mitigating against the costs risks of litigation, a well-timed, considered application for security for costs can put a claimant under a considerable degree of pressure to settle. A successful application for security for costs may precipitate a round of settlement discussions and place a cash-strapped claimant under further litigation cost risk.
However, a note of caution: making an application where the merits of doing so are finely balanced may alienate the other side and force both parties into spending more money on the proceedings, rather than towards settlement. Even if an order was made by the court, this would tie up capital which could be considered as potential money in the “settlement pot”. Equally, if your client has a counterclaim to pursue, the likelihood of security is lower.
As to whether the fact that the other side has legal expenses insurance provides sufficient security, in light of Catalyst, the answer will be that “it depends on the terms of the policy”. The courts are, rightly, looking beyond whether a party simply has an ATE policy, but examining the scope and extent of that policy in detail. This means that before any application is commenced you should at least ask whether the other side has legal expenses insurance and, if it does, request a copy of the policy so that its terms can be examined further.
The conditions to be met in the CPR are specific and the rewards for the other side’s non-compliance with an order for security for costs are (potentially) great (its claim being struck out). The cases of Catalyst, Chuku and Hess show that the courts will use their own discretion in making an award for security. If you are considering making an application for security for costs and the other side is not insolvent, it may be worthwhile taking preliminary expert advice. Look to the bigger picture rather than simply the other side’s balance sheet: examine insurance, letters of credit and the overall impact of security before an application is started. An order for security for costs provides comfort against an overly aggressive claimant, but an unprepared, speculative and ultimately unsuccessful application will do little to bring the parties closer together in terms of settlement.
