Security for costs: delay isn’t always fatal
A balancing act
Under CPR 25.13, the court may grant an order for security for costs if a two part test is satisfied. First, at least one of the gateway conditions listed at CPR 25.13(2) must apply. Secondly, it must be just for the court to make the order in all the circumstances of the case.
Part one of the test is relatively straightforward: put simply, the court must determine whether or not a particular set of facts falls into one or other of the gateways. Part two is harder to predict because of its discretionary nature. Here, the court is required to balance two competing rights: while a good claim must not be stifled, a successful defendant’s entitlement to recoup its costs should also not be compromised.
So, how does the timing of the application affect that balance? While a defendant may issue an application for security for costs at any stage of the proceedings, the court will often take a dim view of any unnecessary delay. There are two important reasons for this. First, the claimant must be given a proper opportunity to raise the required funds. Secondly (and equally importantly), the claimant must have a real choice as to whether to pay up or withdraw. As Mr Millet QC explained at paragraph 36 in Hniazdzilau v Vajgel and others:
“The later the order for security is made and the more a claimant has to spend on legal costs before that date, or in any case before the application, the smaller the opportunity for the claimant to have a real choice… [The claimant’s choice would] not be between putting up security as the price of continuing or else giving up, but doing so as the price of not only continuing but saving his past investment”.
Quite rightly, any delay to the application will tip the balance towards the claimant; but it need not be fatal.
In Optaglio v Tethal, the defendants’ application was heard over five years after the claim was issued and less than four weeks before trial. That application was successful. The “highly unusual” circumstances underlying Judge Barker QC’s decision were as follows:
- The lateness of the application had been exacerbated by the claimant’s “unsatisfactory, deflective or… in some cases, probably incorrect” answers to the defendants’ enquiries. This had created a “misleading impression” of the claimant’s finances.
- The application was premised on the gateway conditions that:
- there was reason to believe the claimant company would be unable to pay the defendants’ costs if ordered to do so (CPR 25.13(2)(c)); and
- the claimant had taken steps in relation to its assets that would make it difficult to enforce an order for costs against it (CPR 25.13(2)(g)).
- Aside from its lateness, the claimant’s principal objection to the application was that it had “pots of assets” at its disposal, including a lucrative subsidiary. In the event that the claim did not succeed, those assets would be more than sufficient to pay both parties’ costs. While the defendants did not dispute this, their solicitors noted that parts of the claimant’s evidence were wholly inconsistent with the claimant’s own statutory accounts. These indicated that ownership of the subsidiary had been transferred from the claimant to another entity in its group.
- The claimant’s evidence in this regard caused the judge to have a “genuine concern” that it had taken steps to put the subsidiary out of the defendants’ reach. This brought CPR 25.13(2)(g) into play. The judge found that, while the claimant had sufficient cash balances to pay the entirety of the defendants’ costs in any event, these could also be transferred beyond the defendants’ reach “in the blink of an eye”. This brought CPR 25.13(2)(c) into play.
- The judge concluded that the claimant had demonstrated “a mindfulness… to, in the event the defendants are successful, leave the claimant in a position where it would be unable to pay their costs if ordered to do so”. On that basis, the second part of the test had been met: it was just to grant an order for security for costs.
Fine Care Homes
In Fine Care Homes Limited v National Westminster Bank plc, the defendant’s application was heard just two months before trial. The defendant issued the application after an unsuccessful mediation but before witness statements had been exchanged.
While there was some debate as to the claimant’s solvency, the judge concluded that the first part of the test had been satisfied: there was reason to believe that the claimant would be unable to pay the defendant’s costs (CPR 25.13(2)(c)). As to the second part, the judge considered the seven criteria listed at paragraph 25.13 of the White Book. While that commentary is helpful, for the purposes of this blog we will focus on just two of those criteria:
- First, whether the application had been used oppressively. The claimant suggested that the defendant’s decision to issue the application shortly after the unsuccessful mediation was a “hostile” act. The judge disagreed. He accepted the defendant’s explanation that it had belatedly realised that the claim really was going to trial and that if an application was to be issued there was no time to lose.
- Secondly, whether the application had been made at a late stage of the proceedings. While the application had undoubtedly been made “very, very late” and this was “highly unsatisfactory”, it had nevertheless made no material difference to the outcome. The claimant had not been deprived of a real choice as to whether to pay up or discontinue and, if anything, it had benefited from the delay because of subsequent favourable case law.
While the claimant was impecunious, its shareholders were “wealthy individuals” who seemed to believe that the claim was compelling. It was not right that they should litigate “risk-free” while the defendant was exposed to the risk that its costs would not be paid. On that basis, the second part of the test had been met, albeit the claimant was granted a generous timeframe in which to raise the security sum.
Tipping the balance
As we explain above, once a defendant has traversed the first part of the test at CPR 25.13, security for costs is all about balance. While delay may help to swing the pendulum towards the claimant, a late application isn’t necessarily doomed to fail. Optaglio and Fine Care Homes both show that there are a number of factors that may help to tip the balance back towards the defendant:
- A reasonable stance as to quantum. In both Optaglio and Fine Care Homes, the court ordered reduced security sums which were reflective of the delay to the applications.
- If an impecunious claimant has the means of raising security (for example, through its shareholders or group entities) this could go a long way towards resisting arguments that the application is oppressive or stifling.
- In Optaglio, the lateness of the application was at least partly attributable to the claimant’s deflective responses to the defendants’ questions about its finances. Such conduct should always be brought to the court’s attention.
- A delayed application may serve to dilute a claimant’s real choice as to whether to pay up and press on or withdraw. While this will undoubtedly cause hardship to some claimants, others may not have contemplated discontinuance at any stage of the proceedings. This begs the question: to what extent has the delay actually prejudiced the claimant and how can this be mitigated? The generous payment terms allowed to the claimant in Fine Care Homes offer good guidance in this regard.
- Part two of the test is clear: the court will consider all of the circumstances of a case when considering an application for security for costs. Delay is just one of those circumstances; it may be outweighed by others. Optaglio is an excellent (if somewhat extreme) example: it was just for the court to grant the order because of the interplay between two of the gateway conditions at the first part of the test.
- Ultimately, every application stands and falls on its own nuances. Delay may raise the bar, but that does not mean that it is insurmountable.
This blog first appeared on the Practical Law Dispute Resolution Blog on 23 January 2020.
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