Security for costs

The usual costs rule in litigation is that the losing party will be ordered to pay a substantial proportion of the winning party's legal costs.

In some cases, the defendant may be confident of successfully defending a claim but may fear that the claimant will not or cannot pay any costs awarded against it. The defendant can apply to the court early in the proceedings for an order that the claimant provide security for the costs it may become liable to pay. This order will usually require the claimant to pay money to the court or provide some other security within a specified period before it is allowed to proceed with the claim.

Security for costs can also be sought by the claimant against the defendant in respect of any counterclaim, by a respondent to any appeal and by an appellant to any cross-appeal.

Security for costs

In commercial litigation, security for costs can usually be sought against a company inside or outside the United Kingdom if there is reason to believe that the company will be unable to pay any adverse costs award made against it. Evidence will have to be presented to the court to show:

• that the company's finances are, or potentially are, in an uncertain state. The evidence will usually include the company's latest accounts. This also gives the company the opportunity to show that it would be able to pay any adverse costs order made against it;
• the amount of costs, actual and future, that the company may be liable to pay. This will assist the court to consider how much security should be awarded, but it should be noted that the total amount of the costs is rarely awarded;

If the court is persuaded that the company would be unable to pay these costs, it has discretion whether to order that security be given. It will take into account factors such as:

• the apparent prospects of success of the claim or counterclaim;
• whether an award for security for costs would be oppressive and would stifle a genuine claim;
• whether the company's financial difficulties have been caused by the other party – for example, by delayed payment;
• any delay in making the application - the later the application, the less likely it is that an order will be granted.

Companies and individuals outside the UK

The court also has discretion to order security for costs against companies or individuals if it is just to make such an order and:

• the company or individual is resident outside England and Wales (but see below in respect of other EU nationals and companies);
• the claimant is a 'nominal' claimant - meaning it is suing for the benefit of some other person - and there is reason to believe that it will be unable to pay the defendant's costs if ordered to do so;
• the claimant's address is not stated in the claim form, or the defendant's address is not stated in the defence and counterclaim or is incorrectly stated;
• either party changes its address during the course of proceedings with a view to evading the consequences of the action;
• either party has taken steps in relation to its assets that would make it difficult to enforce an order for costs.

If the claimant is resident abroad the court will consider the difficulty of enforcing an English costs order in the jurisdiction where the claimant resides. However, the court will almost certainly not order security against an individual simply because that person is a national of and resident in another EU member state, because this would be discriminatory against non-UK EU nationals and against EU law. The discretion can be exercised against a company which is incorporated either within the UK or abroad as long as it can be shown that the company will be unable to pay any adverse costs order made against it – thereby subjecting companies in other EU countries to the same test faced by UK resident companies.

Of increasing importance to the court when deciding whether to make an order for security for costs, is the ability of that company or individual to comply with any order made. A requirement to be able to raise money to cover costs may be in breach of the Human Rights Act, if the effect of that requirement is to prevent the claimant proceeding with litigation - therefore depriving that party of the right to a fair trial.

Conclusion

An application for security for costs can be made at any stage in the proceedings. However, it is best made early and as soon as there is sufficient evidence that the claimant may not be able to pay costs.

An order for security for costs can put the claimant at a disadvantage and may discourage the claim, counterclaim or appeal from proceeding further. It can therefore be a useful weapon as well as a prudent practical safeguard, but the court will be keen to ensure that it is not used merely to hinder a genuine claim.