Generally, in litigation, the losing party is ordered to pay a substantial portion of the winning party's legal costs. Security for costs is a legal remedy that can be sought by a defendant who is concerned they are being pursued by opportunistic claimants who may not be able to (or want to) pay any costs awarded against it.
A security for costs order requires the claimant to pay money into the court in order to protect the defendant's legal costs should the claimant become liable to pay them. A security for costs order is available to:
- The defendant in a claim.
- The claimant in a counterclaim.
- The respondent to an appeal.
- The appellant in any cross-appeal.
Applicable circumstances
Security for costs can be ordered against parties that are both inside or outside of the United Kingdom if the court believes there is sufficient evidence to show that, if an adverse costs order was made against them, they would be unable to pay it. Under the Civil Procedure Rules, the court will grant such a security for costs order where it is "just to make such an order" by taking into account the circumstances in the case.
There are set circumstances where an award can be granted (this is focusing on the defendant making an application for a security for costs order) which are:
- The claimant resides outside the UK and is in a country that is not a member of the EU nor a signatory to the Lugano or Hague Convention or falls under the provisions of the Civil Jurisdiction and Judgments Act 1982. The defendant also has to establish that there is a "real risk" that the claimant will default on paying any costs ordered.
- There is "reason to believe" that the claimant (who is a company or other corporate body) will not be able to pay the defendant's costs.
- The claimant has not given their address on the claim form or has provided a false address.
- The claimant has altered their address since the proceedings began in an attempt to evade the consequences of their action.
- The claimant is a "nominal claimant" and is acting on the behalf of a third party. There is reason to believe that they will be unable to pay the defendant's cost if ordered to do so. Under the Civil Procedure Rules, the court can, in fact, make an award for security for costs against third parties in these circumstances.
- The claimant is managing their assets in such a way that it would be difficult to enforce a costs order against them.
Even if one of these is satisfied, it does not automatically lead to an award and the court retains the discretion to refuse to make the order. The court will require evidence of the party's finances to show that they are potentially uncertain as well as the amount of costs that the party is likely to have to pay in adverse costs. The court will consider various factors when determining whether to make a security for costs order, such as:
- Whether there has been any delay in making the application. It is less likely they will grant an order where the application is made late.
- If the claimant is in financial difficulties it will consider whether the defendant has caused this.
- Would a security for costs order stifle a genuine claim?
- How successful is the claim or counterclaim likely to be?
- The previous conduct of the claimant and whether they have sought to avoid payment in previous litigation.
- The costs of enforcing a judgment in a foreign jurisdiction.
- Whether the claimant has After the Event (ATE) insurance since this typically covers costs arising from litigation. However, the courts are wary since the policies are often absolved where the insured parties have made any false statements or misrepresentations so are not necessarily security for the defendant that the claimant will be able to cover their costs.
Where the court grants security for costs, a date will be given by which the claimant has to provide payment. The amount given can cover both current and anticipated costs and the court is able to increase or reduce the figure initially given. Where the claimant had to pay a security for costs and then wins the case, the amount paid by them will be returned to them. If they lose and there is a surplus once costs are paid, then the surplus is returned to them.
Benefits of security for costs
If security for costs is granted, the claimant faces a real risk of loss. The claimant is required to pay money into court in advance and so this will be lost where their claim is unsuccessful. This can give reassurance to the defendant that any risks on recouping their costs is minimised and instead they can focus on defending their claim.
The fact that the claimant is aware of the possibility of a security for costs order may discourage a claimant from making a claim. It can be useful for the defendant and a practical safeguard against claimants making claims who feel they have "nothing to lose".
Contact our Dispute Resolution Solicitors in 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 40 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 3811 4042 or complete our online enquiry form.
