Putting your money where your mouth is – applications for security for costs

What’s the issue?

Whenever a claimant brings a claim, there is a risk that it will not be successful and will have a costs award made against it.  A question for defendants, at the outset of legal proceedings, is therefore whether the claimant would be able to pay such a costs award.   There may be cause for concern, for example if the claimant resides in certain foreign jurisdictions, or if a company is known to have struggled to pay its debts. Some unscrupulous claimants may strategically use an impecunious or insolvent front company as the claimant in litigation, knowing that they will protected from any costs claim against them if they lose.

This is problematic for defendants because they are then put in a lose-lose situation where they may win the case but will have no way of recovering the legal costs that they incurred in doing so.

How do you deal with this?

The way that the defendants may be able to protect themselves from this risk is by seeking an order from the Court that the claimant put up a sum of money as a form of collateral against any future costs award.  This is known as a security for costs order.

How does it work?

First, it is necessary to gather evidence to show that the claimant company is impecunious and/or insolvent, or sufficient evidence for the Court to deduce that, or the claimant fits into another specific category which allows the Court to exercise this discretion.

Thereafter, the Court will carry out a balancing act between protecting a defendant from the risk of not being able to recover its costs, and not wanting to stifle any genuine claims from being brought.  For example, it may be that the claimant is only insolvent/impecunious as a result of the actions of the defendant that give rise to the claim.  If so, the Court will likely not make an order for security for costs.

Certain circumstances would tend to indicate that security for costs should be ordered, such as the claimant being based outside of the EU, failing to give a valid address, or if it can be shown that the claimant has taken steps to hide/move its assets to make it harder to enforce any costs award against it.

Where the Court agrees that a security for costs order is necessary, the amount of money to be paid, and the stage of payment, is likely to be the subject of legal argument; the court will consider the actual costs the defendant is likely to reasonably incur, and may order security for a particular stage of proceedings only.

What are the consequences?

Once the order has been made, the claimant will have to pay the specified amount into Court or its solicitors’ client account, where it will be held for the duration of the litigation.

If the payment is not made within the required time, then the claimant’s case may be immediately dismissed, or allow the defendant to apply to the court to dismiss following default.

Conclusion

An application for security for costs can be a powerful shield for defendants when faced with a claimant of limited assets and is therefore always worth considering at the outset of litigation. By forcing a claimant to put its money where its mouth is at the outset, a defendant could avoid a claim or avoid some of the risks of defending it.

Tom Burton Wills is an associate in Grosvenor Law’s commercial litigation team where he advises on large scale disputes