In litigation before the courts of England and Wales there is an important procedural rule that the party which is unsuccessful at trial is ordered to pay the legal fees and disbursements (“the costs”) of the party which has succeeded. The court usually orders the losing party to pay around 70% of the costs claimed by the winning party (the “loser pays” rule).
But the loser pays rule can lead to unfairness. If a defendant wins the case brought against it, but the losing claimant does not have the finances to pay the costs order to the defendant, then the winning defendant would have to pay its own costs to defend a claim which should never have been brought against it in the first place.
To reduce the risk of this outcome, the English courts have developed the Security for Costs order. This order requires a claimant with inadequate finances to provide financial security to the defendant at the beginning of the litigation so that the defendant can recover its costs if it wins the claim brought by the claimant.
On a general level the security for costs order discourages speculative claims by ensuring that a claimant cannot escape liability to pay the defendant’s costs which the claimant’s unmeritorious claim has forced the defendant to incur.
By way of example, let’s assume that a Japanese company has exported a consignment of virtual reality goggles to an English company, but the English company refuses to pay for the consignment. It alleges that the goggles are not of satisfactory quality. The claimant Japanese company decides to bring a claim against the English company for the payment in the English High Court. The defendant English company would then demand that the Japanese company provides security for its costs. It would seek security so that it can recover its costs easily if it defeats the Japanese company’s claim in the English High Court.
When is Security available to a defendant?
Typically the defendant’s lawyers will check the financial position of a corporate claimant at the outset of a case, usually by considering its filed accounts. If that financial position shows that the claimant could not pay a court order for the expected amount of the defendant’s costs, then the defendant’s solicitors will write to the claimant’s solicitors requesting that the claimant provides security.
If the claimant refuses that request, then the defendant can make an application to court for an order for security for costs at the first case management conference before the court, where procedural issues are considered.
If the matter proceeds to court then the defendant will need to show that there is a risk that a future costs order in its favour would not be paid by the claimant. This could be because:
- The claimant is based outside of the jurisdiction, making enforcement of an order difficult abroad;
- The claimant is a company (incorporated in England and Wales or abroad) 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 not been open and honest about its name, address, place of business or other contact details to attempt to avoid the consequences of an unsuccessful claim;
- The claimant appears to be putting its assets out of reach of the courts so that the defendant will not be able to recover its costs if it wins the litigation against the claimant; or
- The claimant is the claimant in name only, and in fact represents another entity which is the real claimant; this would make costs recovery complicated for the defendant.
In our example the Japanese company is based outside of the jurisdiction of the English High Court, so it would be ordered to provide security.
How much Security can be awarded and at what stage in the litigation?
The court will decide how much to award when considering the application. It is generally 60% or slightly above, but could be up to 85% of the costs incurred and anticipated to be incurred by the defendant as the litigation continues.
The defendant will first need to provide a detailed breakdown of its costs already incurred and its predicted future costs of the litigation. This will enable the court to make its decision on the security of the costs application. The court will order an amount of security which is:
- just and proportionate, and
- which will protect the defendant financially against the risk of not being able to recover its costs, while not preventing a genuine claim from proceeding by being too harsh and oppressive in terms of the amounts which the claimant must provide and at what stage of the litigation it must provide those amounts.
How can Security be provided?
The claimant can be ordered to provide one of the following:
- Payment into court of a specified sum at the outset, or of staged amounts meaning a payment before each stage of the litigation, e.g. just before disclosure and just before exchange of factual and witness statements and then just before trial;
- A bank guarantee or surety, where the bank guarantees to pay up to a specified sum if the claimant fails to pay a costs order to the defendant;
- A solicitor’s undertaking, with money held by the claimant’s solicitor and released to the defendant, if the court makes a costs order against the claimant; or
- A deed of indemnity, where a litigation fund or parent company guarantees to pay a costs order in favour of the defendant.
If a claimant has secured an After the Event (“ATE”) insurance policy which covers the risk of the claimant being ordered by the court to pay the defendant’s costs, then the court may accept that the policy provides sufficient security, without requiring anything further from the claimant.
The question whether an ATE policy is adequate often raises further questions for the court to consider.
Can an ATE policy provide adequate Security for Costs?
Typically, the claimant will wish to argue that the ATE policy is adequate, whilst the defendant will argue that it is not. The defendant will want to put pressure on the claimant to find the funds to put up more security and so hopefully to discourage the claimant from continuing with its case. The claimant will want to avoid this.
The defendant is likely to argue that if there is any prospect that the costs insurer could withdraw its liability to pay the defendant’s costs at the end of the trial, then the policy will not be adequate. The claimant will counter this argument by purchasing an anti-avoidance endorsement to the policy. This endorsement is designed to prevent the insurer refusing to pay the costs for various reasons.
Going back to our example, the Japanese company would be well advised to obtain both an ATE policy and an anti-avoidance endorsement in order to provide adequate security for the English company’s costs. If it wins the claim then it does not pay any of the English company’s costs. It will expect to be paid around 70% of its own costs from the English company. But if the Japanese company loses its claim then the ATE insurers will pay the costs which the English Court orders it to pay to the English company.
How 3CS can help
If you are involved in any dispute, our expert dispute resolution solicitors can advise you of the options available to you including tactical issues such as Security for Costs.
For advice or guidance, please get in touch.
