Upon final judgement in litigation, a court will usually order the unsuccessful party to cover a portion or all of the successful party’s costs for taking part in proceedings. At the outset of litigation, one party may lack confidence that the other will be willing or able to cover an award of costs should they lose the claim. This will often arise where a claimant makes an opportunistic claim and the defendant believes the claimant is unlikely to succeed and does not have sufficient resources to cover both parties’ costs.
Recent years have witnessed an increase in cross-border transactions. Out of these may arise cross-border proceedings where a claimant residing in another country withdraws from proceedings after initially raising them, as well as expensive enforcement costs brought by a defendant against a claimant in a foreign jurisdiction.
To be prepared for these occurrences, a party, usually a defendant, will make an application to the court for security for costs at the commencement of proceedings. Security for costs can also be applied for in reaction to a counterclaim against a claimant.
Under what circumstances is security for costs granted?
The Civil Procedure Rules provide that security for costs will be granted when it is “just to make such an order” having regard to the circumstances of the case. The Rules provide exhaustive circumstances where a defendant will receive an award.
- The claimant resides outside of the UK, in a country that is not a member of the EU, signatory to the Lugano or Hague Convention, or falls within the provisions of the Civil Jurisdiction and Judgements Act 1982. A “real risk” that the claimant will default on costs also has to be established by the defendant.
- The claimant is a company or other corporate body (including those incorporated outside of the UK) and there is “reason to believe” that it will not be able to pay the defendant’s costs.
- The claimant has altered their address since the commencement of proceedings in an attempt to withdraw from them, or they have provided a false address or failed to provide one altogether.
- The claimant is a “nominal claimant” – acting on behalf of another person, and there is reason to believe they will be unable to meet an adverse cost order.
- The claimant is managing their assets in a manner that would make it difficult to enforce an adverse cost order against them
Fulfilment of one of the above criteria does not lead to an automatic reward, and courts retain discretion to refuse. Previous conduct of the claimant, if they have sought to avoid payment of costs in prior litigation, may be considered by the court. A court will also take into account the costs of enforcing a judgement in a foreign jurisdiction.
Is After the Event (ATE) Insurance considered sufficient to cover costs?
If a claimant is covered by After the Event (ATE) insurance, this will be taken into consideration by a court when it assesses a need to grant security for costs.
ATE insurance policies typically cover parties entering litigation and the costs arising from proceedings. The terms of the ATE policy will be subject to scrutiny, as well as the insurer’s perceived willingness to cover adverse cost awards. Courts have been hesitant to take ATE policies at face value, as they often contain clauses that absolve the insurer from payment if the insured has made false statements or misrepresentations.
Is security for costs available against third parties?
As mentioned above, in some cases a claimant will be a nominal claimant, acting on behalf of a third party in return for a share in amounts recovered. A third party may also assign their right to claim to a claimant who then brings a claim, so that third party can avoid liability for litigation costs.
The Civil Procedure Rules provide that a court may make an award for security for costs against third parties in such circumstances.
Is security for costs available for appeals?
Security for costs is available for parties who apply during an appeal. Awards can be made in favour of an appellant or respondent on the same circumstances considered for the initial trial stage.
What is the procedure for applying for security for costs?
A defendant seeking security for costs must provide evidence that satisfies one of the criteria above. If granted, the court will provide a date by which the claimant must provide payment. The amount due can account for both current and anticipated costs, and the court may later increase or reduce the initial figure.
What happens to surplus amounts or where the party given security for costs loses?
After fulfilment of an adverse costs order, any surplus money is returned to the party the award was made against. If the claimant who was compelled to pay security for costs goes on to win the case, any amounts paid as security will be returned to them.
Contact our Security for Costs Solicitors in Mayfair and throughout London
Security for costs is an effective means of warding off potential troublesome claimants, or obtaining financial security if a claimant is on the brink of insolvency. As commercial transactions are increasingly taking place across jurisdictional borders, there is, in turn, a heightened need for financial certainty where parties must resort to litigation to settle disputes.
Lewis Nedas Law has over 25 years of corporate litigation experience with both domestic and international clients in a broad range of matters, including preliminary actions for security for costs. For expert advice from our Dispute Resolution Solicitors, please call us on 020 7387 2032 or complete our online enquiry form.