The buck stops where? Relevance of the defendant’s funding arrangements to an application for security for costs

04-10-2021


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 (CPR 25.13(1)(a)).

In Heathfield International LLC v Axiom Stone (London) Ltd & Medecall Ltd, the Court of Appeal considered the relevance of the defendant’s funding arrangements to the second part of this test.

Background

Axiom Stone (London) Limited (Axiom Stone) was a firm of solicitors. Quantum Medical Ltd (Quantum) had provided medical reports to Axiom Stone for use in the assessment of personal injury claims. Axiom Stone did not pay Quantum for a number of the reports it had produced.

Quantum assigned its cause of action against Axiom Stone to Heathfield International LLC (Heathfield), a company based in Delaware, USA. Heathfield then issued proceedings against Axiom Stone for the balance of Quantum’s unpaid invoices. By the time the claim was issued, Axiom Stone was dormant and had ceased practising.

Axiom Stone defended the claim on a number of grounds, including allegations of forgery and fraud. It also maintained that it had never contracted with Quantum; rather, the second defendant, Medecall Ltd, had engaged Quantum to prepare the medical reports.

Axiom Stone issued an application for security for costs on the grounds that:

First instance

At first instance, Barker J expressed concern about the reliability of the parties and stated that he had approached the underlying facts and evidence with “a degree of caution” (paragraph 14). It was, however, common ground that Heathfield was: (i) unable to pay the security sought by Axiom Stone; (ii) based outside of the jurisdiction; and (iii) a nominal claimant. The gateway conditions at CPR 25.13(2)(a) and (c) were therefore engaged. All that was left to be determined was whether an order for security would be just in all the circumstances of the case.

Barker J went on to note something rather peculiar: the applicant, Axiom Stone, was itself a dormant company with negligible assets. It was therefore unclear whether the costs for which it sought security were actually being incurred and, if so, who was funding them. Put another way, who would benefit from an order for security for costs?

Barker J dismissed the application and refused to grant Axiom Stone permission to appeal. In his detailed reasons, Barker J noted that it was unclear why Axiom Stone, a “marginally solvent non-trading English company” was prepared to fund an expensive defence to a claim brought by Heathfield, “an impecunious Delaware corporation”. Conversely, it was not clear why Heathfield was pursuing a claim against a marginally solvent and dormant company in the first place. In the circumstances, the fact that the parties’ funding arrangements had not been explained was “a relevant consideration” (paragraph 18).

The Court of Appeal granted Axiom Stone permission to appeal on a single ground: whether the fact that Axiom Stone was not funding its defence was relevant to the determination of its application.

Appeal

Axiom Stone argued that Barker J had established a worrying precedent: there was now High Court authority for the principle that an application for security for costs could be declined on the ground that the defendant could not afford to fund their defence. The requirement that a defendant disclose its funding arrangements would have “a chilling effect, deterring such defendants from making an application for security, and potentially leading to satellite litigation” (paragraph 23).

In his lead judgment, Nugee LJ noted that several aspects of the case were “rather mysterious” (paragraph 28):

In light of the case’s novel features, the Court of Appeal rejected Axiom Stone’s contention that Barker J’s findings would have general application. In fact, these were “no more than an exercise of his discretion on the particular facts of this case” (paragraph 28).

The Court of Appeal also considered whether a defendant’s funding arrangements could have any relevance to an application for security for costs. As Nugee LJ noted, CPR 25.13(1)(a) provides that the court must be satisfied, having regard to all the circumstances of the case, that it is just to make an order for security. The defendant’s funding arrangements were such a circumstance. Barker J had therefore been entitled to have regard to Axiom Stone’s funding arrangements when considering whether to exercise his discretion (paragraphs 30 and 32).

Comment

While the underlying facts may be novel, Heathfield v Axiom Stone contains points of universal application.

Practitioners will be reminded of the broad scope of CPR 25.13(1)(a): when considering whether to exercise its discretion, the court must have regard to all the circumstances of the case. It is not for the parties to decide that some of those should be beyond the court’s consideration.

The case also highlights the importance of candour. A court will be slow to exercise its discretion in favour of a defendant seeking security where it does not consider that it has adequate visibility of the circumstances underlying the case. This is particularly so where the parties’ actions appear illogical and lacking in commercial sense, and their evidence is viewed as unreliable.

This article first appeared on the Practical Law Dispute Resolution Blog on 29 September 2021.

For more information on how Gardner Leader can assist you, please contact Katie Dyson or Chris Felton in our Dispute Resolution team.


Katie Dyson

Senior Associate
Commercial Disputes

Chris Felton

Partner
Commercial Disputes

Share this article

<i class=