What is security for costs?

It is the typical rule in litigation that the losing party will be ordered to pay a large proportion of the winning party’s legal costs. If a claim is made against a party, they will be required to incur costs in defending their case, but they risk the possibility of the claimant not being able to pay the sum of costs awarded against them if they successfully defend the case.

In these circumstances, the defendant can apply to the court in the early stages of proceedings to obtain an order that stipulates the claimant must provide security for costs to ensure that they can pay any adverse costs.

An order for security for costs will usually require the claimant to pay money to the court or provide another alternative form of security, within a specified period, before they are permitted to proceed with the claim.

An application for security is made pursuant to Civil Procedure Rule 25.12 (CPR 25.12). An application for security of costs can only be permitted once proceedings have commenced and should be made as early in the proceedings as possible. It is recommended that a Security for Costs application is made with the assistance of an advisor.

Benefits of applying for security for costs

There are significant benefits of applying for security for costs (SfC), one of which is that it significantly reduces the financial risk of litigation for defendants.

The claimant will be required to pay the defendant costs, if ordered, in the circumstances that their claim is unsuccessful. If the claimant does not have the funds to pay the costs of the defendant, the defendant could be left out of pocket if security for costs is not obtained.

The costs will sit with the court and will comfort both conventional litigation and a financier that the risks that come with recovering costs are minimised, which means that the proper focus needed can be paid to defending the proceedings.

Security for costs requirements

In order to pursue security of costs, evidence must be presented to the court to show that the opposing party’s finances are in an uncertain state. This evidence is typically provided in the form of the party’s latest accounts. This will also give the opposing party an opportunity to prove that they would be able to pay any adverse costs order made against them.

The amount of costs, both actual and future, that the party may be liable to pay must also be presented. This assists the court in considering the amount of security that should be awarded.

If the court is persuaded that the claimant would be unable to pay these costs, it may grant an order that security should be given.

Can After the Event Insurance (ATE) provide security for costs?

If a claimant is covered by After the Event (ATE) Insurance, this will be taken into consideration by the court when assessing the need to grant security for costs.

ATE insurance policies usually cover parties entering litigation and the costs that arise from proceedings. The terms of the ATE policy will be examined, as well as the insurer’s location and rating.

It is now common for claimants to provide either anti-avoidance endorsements (AAE) or a Deed of Indemnity should an application be made against them for security for costs.

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

The defendants argued that, because the claimants were in Liquidation, they had reason to believe that they would be unable to pay the defendants’ costs if ordered to do so. As a result, the defendants issued an application seeking around £7.2million in security for costs from the liquidators.

The claimants obtained ATE in the sum of around £5m (from multiple insurers) to cover any adverse costs orders that might be made against them. They did not obtain deeds of indemnity from the insurers. As a result, the defendants sought security for their costs in the sum of approximately £7.2m.

PWC’s legal team contended 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 took the side of 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 can Annecto Legal assist with Security for Costs?

Security for Costs is an effective method of defending against potentially troubling claimants and obtaining financial security when a claimant faces the brink of insolvency.

Although having legal expenses insurance in place may provide adequate security for costs, the case of Premier Motor Auctions v PWC highlights the importance of having the right solutions for you case and thinking of the potential issues further down the line.

Annecto legal can discuss the best ways to meet a request for SfC in commercial litigation, such as a fully deferred and contingent ATE insurance policy or a Deed of Indemnity. You may also wish to consider how SfC could be staged throughout the claim to reduce the price, and there are various other ways to minimise costs to the claimant.

We provide our services to a range of clients, including businesses, solicitors, insolvency practitioners and liquidators, commercial insurance brokers and individuals. We can also help to put our clients in touch with solicitors for dispute resolution purposes, as well as assist in the preparation and presentation of claims, to maximise success in the underwriting and due diligence phase.

This is an important role as may claims fail to secure ATE due to poor presentation and preparation. Annecto’s vast experience in working with litigation funders and ATE underwriters gives clients the best chance of securing the right product at the best price.

Get in touch with an expert member of our team to find out more about security for costs and which litigation cover is the right litigation funding choice for you.

Call us today 0800 612 6587, or our business development director, Mark Beaumont, can be contacted by email mark@annectolegal.co.uk