What is security for costs?

Security for costs is a legal concept that allows a defendant in a civil case to request that the claimant provides a financial guarantee to cover the defendant’s costs in the event that the claimant loses the case. This is typically done to ensure that if the defendant prevails, they will be able to recover their legal expenses from the claimant.

The principle behind security for costs is to prevent situations where a successful defendant is unable to recover their adverse costs from a financially incapable claimant. This might occur, for example, if the claimant is a company with limited assets or an individual with little means.

In order to request security for costs, the defendant must demonstrate to the court that there is a real risk that, if they are successful in defending the claim, they will not be able to recover their legal costs, if ordered, from the claimant. The court will then consider various factors, such as the claimant’s financial situation, before deciding whether to give an order for security to be provided.

It’s important to note that whilst security for costs can be an effective tool for defendants, the court has discretion to order security for costs and will also consider whether ordering security would effectively deny access to justice for the claimant.

CPR 25.13 allows the court to order security for costs if it deems it just, considering the circumstances. This can happen if:

• The claimant resides outside the jurisdiction and is not in a state bound by the 2005 Hague Convention.
• The claimant is a company or entity (inside or outside Great Britain) and there is reason to believe they can’t cover the defendant’s costs.
• The claimant changed their address to evade litigation consequences.
• The claimant’s address is not stated, or the claimant provided an incorrect address in the claim form.
• The claimant is a nominal claimant (except as a representative claimant under Part 19) and there is doubt about their ability to cover the defendant’s costs.
• The claimant has taken actions regarding their assets that would hinder the enforcement of a costs order against them.

How security for costs is used as a defendant tactic

Security for costs can be used as a tactical move by a defendant in a commercial case for several strategic reasons:

• Financial protection: The primary purpose of applying for security for costs is to protect the defendant from incurring significant legal expenses that may not be recoverable if they win the case. This is particularly important when dealing with claimants who may have limited resources and may be unable to pay the defendant the full amount of costs ordered by the court.
• Pressuring the claimant: The mere threat or application for security for costs can put pressure on the claimant. It signals to the claimant that the defendant is serious and financially capable of pursuing the case to its conclusion. This can sometimes incentivise the claimant to reconsider their position or be more open to settlement negotiations.
• Weakening the claimant’s position: For some claimants, providing security for costs can be a significant burden. It might strain their financial resources and potentially weaken their resolve to continue with the case. This can be especially true for individuals or smaller businesses.
• Delaying tactics: By making an application for security for costs, the defendant can introduce an additional procedural step in the case. This can lead to delays in the proceedings, potentially causing frustration or financial strain on the claimant.
• Negotiating leverage: The threat or actual application for security for costs can be used as leverage during settlement negotiations. It may push the claimant to be more open to settling on terms favourable to the defendant, especially if the claimant is concerned about their ability to provide the required security.
• Discouraging weak claims: Knowing that they might have to provide security for costs can deter claimants from pursuing weak or speculative claims. It adds an extra layer of financial risk for the claimant, potentially making them think twice before proceeding.

It’s important to note that whilst security for costs can be an effective tactic for defendants, it’s not always granted by the court.

Ultimately, the decision to grant security for costs is at the discretion of the court, and it will consider all relevant factors, including the requirements under CPR 25.13, before making a ruling.

Funding security for costs

When a court orders a claimant to provide security for costs, it means that the claimant must deposit a specified amount of money into a court account or provide a suitable form of financial guarantee to cover potential legal costs to cover any adverse costs orders.

Listed below are some common ways in which a claimant may fund security for costs:

• Cash deposit: The claimant may be required to deposit a specified amount of money directly into a court account. This cash deposit serves as a guarantee to cover potential costs if the claimant loses the case.
• Bank guarantee or bond: Instead of a cash deposit, a claimant may obtain a bank guarantee or bond. This is essentially a financial instrument issued by a bank that guarantees payment to the defendant in case the claimant loses the case.
• Legal expenses insurance: In some cases, a claimant may obtain a legal expenses insurance policy specifically designed to cover potential legal costs in the event of an adverse judgment. An after the event (ATE) insurance policy may serve as adequate security for costs.
• Third-Party Funding: The claimant may seek financial support from a third-party litigation funder. These funders provide the necessary funds in exchange for a share of the potential proceeds if the case is successful.

It’s important to note that the specific method used to fund security for costs will depend on the circumstances of the case and the resources available to the claimant. Additionally, the court may have specific requirements or preferences regarding the form of security that is acceptable.

ATE insurance to fund security for costs

If a claimant holds After the Event (ATE) Insurance, the court will consider this in its evaluation of whether to grant security for costs.

ATE insurance typically covers parties involved in dispute resolution, including the associated expenses. The court will scrutinise the ATE policy’s terms, as well as potentially the location and rating of the insurer.

It is common for a defendant to challenge the ATE policy as a further tactic in defending the claim made against them.

Claimants often provide either anti-avoidance endorsements (AAE) or a Deed of Indemnity if an application for security for costs is made against them.

In the case of Premier Motor auctions Ltd (in Liquidation) v Price Waterhouse Coopers LLP [2017] EWCA Civ 1872, it was ruled that the claimant’s ATE policy couldn’t serve as an alternative to granting security for costs.

The defendants argued that due to the claimants being in Liquidation, there was reason to doubt their ability to cover the defendants’ costs if ordered to do so. Consequently, the defendants sought around £7.2 million in security for costs from the liquidators.

The claimants had secured ATE coverage of approximately £5 million (from various insurers) to cover any potential adverse costs orders. They did not obtain deeds of indemnity from the insurers. Thus, the defendants pursued security for their costs amounting to roughly £7.2 million.

PWC’s legal team argued that ” “unlike the payment of money into court, a bank guarantee, or a deed of indemnity, the ATE policies were not adequate security because they could be avoided in certain circumstances by the insurers”.

Longmore LJ sided with PWC, stating;

“I cannot see that on the facts of this case these defendants have that assurance. It follows therefore that there is reason to believe that the Companies will be unable to pay the defendants’ costs if ordered to do so and that the jurisdictional requirement of CPR 25.13 is satisfied.”

How Annecto Legal can assist

A security for costs order is an effective method for defending against potentially troubling claimants and helping to obtain financial security. Annecto Legal can discuss the best options available to meet a request for security for costs in commercial litigation.

We provide our services to a range of clients, including businesses, liquidators, insolvency practitioners and solicitors, commercial insurance brokers and individuals.

We can also assist our clients by putting them in touch with professional solicitors for dispute resolution purposes, as well as assist in the presentation and preparation of claims in order to maximise success in the underwriting and due diligence phase.

Get in contact with an expert member of our team today to find out more regarding applications for security for costs and which litigation cover is the appropriate litigation funding choice for you.