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Security For Costs – Protecting The Possible Costs Recovery Of Successful Defendants

29 April 2021

Over recent years there has been an increase in the number of defendants using the protections provided by Security for Costs.  This process is available to defendants where there is a risk that if the case is successfully defended a costs order may not be enforceable against the losing claimants.

So why is security for costs needed? Civil Procedure Rule CPR 44.2 (2) (a) sets out the general rule that an unsuccessful party will be ordered to pay the costs of the successful party.  In such circumstances it is clearly unfair for a defendant to have to defend a claim when there is a genuine risk that it will not recover costs if successful.

An application for security for costs is covered by CPR 25.12 to 25.15 which sets out the conditions to be satisfied for an order to be made; who can be ordered to pay security and specific provisions for security for costs of an appeal.

Security for costs is therefore to provide ‘peace of mind’ to a defendant by requiring a claimant to provide security by way of various means such as a payment into court or insurance policy for an amount that is appropriate for the defendant’s costs of the whole or part of the proceedings.

Circumstances for security for costs to be ordered

An order for security for costs must not frustrate a legitimate claim but is there to protect defendants from the risk that costs orders may not be enforceable.  Therefore CPR 25.13 (2) requires one or more of a number of conditions to be met for an order to be made.  These are summarised below:

  • That the claimant is resident outside of the jurisdiction but not resident in another country where a Convention or Agreement exists that allows judgments in other jurisdictions to be enforced;
  • The claimant is a company or other body (incorporated inside or outside GB) and there is reason to believe that it will be unable to pay the defendant’s costs;
  • The claimant has failed to give an address and gave an incorrect address on the claim form; changed address or taken steps in relation to its assets to evade or make it difficult to enforce a costs order;
  • Claimant is acting as a nominal claimant, other than as a representative claimant in Group Litigation, and there is reason to believe that he will be unable to pay the defendant’s costs.

If the criteria to order security are met the court is required to determine if it would be just to make such an order.  When doing so the court will consider a number of factors summarised below:

Does the claimant have a bona fide claim and does the claimant have a reasonable prospect of success;

  • Has the defendant made an admission in the pleadings or an open offer;
  • Is the application being used oppressively to stifle a genuine claim;
  • Has the conduct of the defendant caused financial hardship for the claimant;
  • Has the application for security for costs been made at a late stage.

The claimant’s prospect of success is therefore given weight when considering whether to order security for costs.  However, the court is not expected to consider the merits of the claim in any detail and is only to consider probability of success.

Breakdown of Security for Costs being claimed

When applying for security for costs a breakdown of costs is required but a full Bill of Costs is not required.  However, it does need to provide sufficient information for the court to determine the reasonable level of security to order.  In some cases the costs information provided could be best described as scant, which must be avoided.

The breakdown of costs needs to show the amount of solicitor time, counsel fees and disbursements incurred and also a breakdown of the future costs.  Many cases where security for costs is appropriate will go through costs budgeting and therefore the defendant’s Precedent H is an ideal starting point for this purpose.

Level of Security

The amount allowed by the court is likely to have a direct correlation to the strength or weakness of the claimant’s case.

Defendants need to show that the level of security sought is appropriate and the court will consider all the circumstances of the case to decide what a suitable level to of security to order.

It is not unusual for the court to deduct 25%-33% of the incurred costs to take account of:

i) Possible settlement;

ii) Likely reduction in costs;

iii) Ability of the Claimant to pay the level of Security.

In considering future costs the court will normally consider these as a whole but again take account of a possible settlement.  The court will also consider the possible reductions that could be made on detailed assessment.

When deciding the amount of security to order the court is greatly assisted by an approved costs budget and the court is expected to use that approved costs budget as an appropriate reference point.

Thus, where there is an approved costs budget the starting point for the court, before taking any other factors into consideration, could be as follows:

i) Allow 60% to 70% of the incurred costs;

ii) Allow 100% of the approved/agreed estimated costs as per the approved costs budget.

This is a very similar process and conclusion that is reached when seeking a payment on account at the end of a trial in accordance with CPR 44 2 (8).  However to determine the amount of security for costs the court also has to consider other factors such as the ability of the claimant to pay the level of security.  The Judge may also determine that security for costs is only appropriate in respect of certain sections, or phases, of the claim and reduce the amount of the security for costs to reflect this.  The amount of the security will also not include the costs of the application for security for costs.

Security for Costs against Funders/ATE Providers

CPR 25.14 provides the court with the power to order security for costs to be paid by a party other than the claimant where that party has (a) assigned the right to the claim to the claimant with a view to avoiding costs consequences or (b) where that party has contributed or agreed to contribute to the claimant’s costs in return for a share of the damages the claimant may recover in the proceedings.

The case of Rowe & Ors v Ingenious Media Holdings PLC & Ors [2021] EWCA Civ 29 is an important decision that provides further clarity to security for costs from Funders/ATE Providers.

In Rowe the High Court had ordered the claimant’s litigation Funder to provide security for four of the defendants but also ordered that those defendants give a cross-undertaking in damages in respect of the external costs of providing security. The claimants appealed the decision limiting the cross-undertaking and the defendant’s appealed that the court should not order an undertaking in any event.

The Court of Appeal held that it should only be in a rare and exceptional case that the court should require a cross-undertaking in favour of a claimant as a condition of ordering security for costs, and only in even rarer and more exceptional cases that it should do so in favour of commercial litigation funders.  The court therefore held that security for costs should be ordered in this case where the Funder controlled/benefitted from the proceedings.

A relevant factor in reaching this decision was that the claimants were funded in three ways; by a litigation Funder; ATE insurance policies and some of the claimants were funding the litigation themselves.  As the litigation Funder had provided no details of its financial position and there was a real risk that the ATE insurance policies would not cover the defendants’ costs in full, it was decided to order the litigation Funder to provide security for costs to four of the defendants.

The Court then had to consider the level of security to be paid by the Funder. To decide the amount it was again noted that some claimants were funding the proceedings themselves and the Court determined that there were two main principles:

i) The liability of third parties under s. 51 of the Senior Courts Act 1981 (such as funders) is not secondary to, or dependent on, the position of the claimants;

ii) Orders under s. 51 against non-parties are always exceptional but that does not mean more than outside of the norm. Whilst each case turns on its own facts a Funder acting in its own commercial interest for gain has no legitimate expectation that it will be treated any differently from any other real party.

The Court determined on these general principles that the Funder should pay security on a pro rata basis to their position with the claimants who are funded by them and that deductions should be made to take into account the value of the policies attributed and a reasonable disallowance of costs of detailed assessment.

The decision in this case was important and removed the reliance on the ‘Arkin Cap’ (Arkin v Borchard Lines Ltd.2005), when considering the level of liability under CPR 25:14 to award as Security against a commercial Funder, by looking at the level of interest and control the Funder had on the proceedings, the contents and value of the policy and whether this would be sufficient to provide adequate security awarded.

This briefing is prepared by Malcolm Goodwin and Anthony James.  It is not intended to be an exhaustive statement of the law and should not be relied on as legal advice.