Security for Costs – a key tool for defendants
13 May
This is the first article in our series on security for costs in English litigation and arbitration. Future articles in the series will compare and contrast the factors relevant to applications for security for costs in English litigation and international arbitration.
For individuals or companies defending litigation or international arbitration proceedings in England, there are procedural steps you can take to protect your position.
Security for costs is one key example, as it minimises the risk that you or the company will be left out of pocket for your legal expenses if you successfully defend the claim.
What is security for costs?
An order for security for costs requires a claimant to provide security for the defendant’s actual and/or reasonably anticipated costs of the litigation or arbitration. This can prevent a positive court or arbitration result from turning into a pyrrhic victory. The value of a costs order made in your favour can quickly become worthless if it turns out that the claimant has no means to pay it.
The grounds to obtain an order for security for costs
Applications for security for costs in English civil proceedings are governed by the Civil Procedure Rules. Arbitration proceedings are subject to the rules of arbitration institutions or tribunals, which often give arbitrators significant flexibility to manage procedural matters such as security for costs.
There are, however, some grounds common to both arbitration and litigation proceedings which can give a court or tribunal the power to make an order for security for costs.
Often, the pertinent grounds for a security of costs order are either that:
- The claimant is an impecunious or insolvent company which will be unable to pay the defendant’s costs of the proceedings if ordered to do so; or
- The claimant has taken steps that would make enforcing an adverse costs order difficult, either by transferring or dissipating assets.
Timing is everything
It’s important to stress that timing is of the essence when it comes to a security for costs application. While it is advisable for an application to be made promptly and early on in proceedings, it should be made when information is known about the parties’ respective positions on the issues in dispute. This is because the court or tribunal is likely to assess whether the claim and defence are being advanced in good faith and have reasonable prima facie prospects of success.
Lateness in making an application can be a reason for an order for security to be refused. Even if security is ordered to be paid, the court or tribunal may reduce the amount ordered due to the delay. To maximise the prospects and impact of a successful application, it is imperative for it to be considered as soon as possible after the claim is served or if the claimant’s financial circumstances deteriorate during the proceedings.
The form of security
Should the court or tribunal deem it appropriate to award security for costs, it has a wide discretion in deciding the amount and type of security. Security can take the form of a guarantee from a parent company or bank, or payment into the court or arbitral institution.
An order for security of costs will usually require the claimant to provide the security within a reasonable time and can be ordered to be provided in stages as the proceedings progress.
What happens if an order for security for costs is not complied with?
Should an order for security not be complied with, the claim can be stayed (i.e., suspended) pending compliance. The claim may also be struck out or dismissed if security from the claimant is not provided.
The bottom line
An application for security for costs is an important step to be considered in litigation or arbitration proceedings. An order for security for costs may discourage the claimant from proceeding with the claim and can provide defendants with protection from being left out of pocket.
For more information, please contact Baruch Baigel or Noam Greenberger at Asserson.