Whether prosecuting or defending litigation, the associated costs can be, and often are, significant. Any comfort that might be drawn from the possibility of recovering an element of those costs from the losing adversary may be qualified by the risk of that losing party ultimately being unable to pay. For those reasons, applying for security for costs, by which a party is ordered to make a payment into court, or provide some form of guarantee, as security for its opponent's costs, will be a consideration for many litigants, and litigators, at some stage in the life of a claim.
The Commercial Court recently considered, in a judgment handed down by Mr Justice Henshaw that will be of interest to litigants and practitioners, the circumstances in which it would grant security for costs, addressing, in particular the meaning of "residence" for the purposes of CPR 25.13(2)(a), as well as the types of conduct that may impact upon an application for security.
An application for security for costs was made in the context of the ongoing case of Pisante and others v Logothetis and others1, in which a two week trial is scheduled for later this year.2 The complex underlying dispute relates to poorly performing investments in the shipping market made by the Claimants, allegedly having been fraudulently induced to make those investments by the Defendants. The total amount claimed is in excess of US$14 million.
The Defendants first requested security for costs from the Claimants on 3 December 2019. There followed a lengthy back-and-forth between the parties. Initially, this concerned the necessity for the Claimants to provide any security; the Claimants' position was that the parties already had, from their business relationship, knowledge of, and insight into, each other's financial positions. The Claimants latterly accepted that some security might be provided, and the exchanges then turned to the appropriate value of that security.
As part of this exchange, and having agreed to provide security in the amount of £500,000 (against the Defendants' then estimated costs of around £930,000), which the Defendants considered to be insufficient, the Claimants provided a letter from one of its banks, stating that it had "available liquidities" in excess of £1.3 million, and an average balance in excess of £5 million over the last five years. The Defendants remained of the view that this provided insufficient comfort, however, and issued an application for security.
In response to the application, the Claimants then made an open offer to provide security in the amount of £750,000, which was initially rejected. Following a higher counter-offer by the Defendants, which was rejected by the Claimants, and the service (without permission) of further evidence by the Claimants immediately prior to the hearing of the application, the Defendants then indicated that they were, subject to certain caveats, prepared to accept the £750,000 previously offered. The Claimants responded, however, that they were no longer prepared to provide any security, and would contest the application in full.
The security for costs application and the reply
Security for costs, in the context of litigation, are addressed by CPR Rule 25 (a separate regime governs security for costs in arbitrations). CPR 25.13(1) provides that:
"(1) The court may make an order for security for costs under rule 25.12 if (a) it is satisfied, having regard to all the circumstances of the case, that it is just to make such an order; and (b) one or more of the conditions in paragraph (2) applies…"
In the present case, the Defendants sought to rely upon conditions (a) and (c) of CPR 25.13(2), the requirements of which are as follows:
"(a) the claimant is
(i) resident out of the jurisdiction; but
(ii) not resident in a Brussels Contracting State, a State bound by the Lugano Convention, a State bound by the 2005 Hague Convention or a Regulation State, as defined in section 1(3) of the Civil Jurisdiction and Judgments Act 1982.
(c) the claimant is a company or other body (whether incorporated inside or outside Great Britain) and there is reason to believe that it will be unable to pay the defendant's costs if ordered to do so."
More specifically, the Defendants asserted that each of the Claimants was resident outside of the jurisdiction for the purposes of 25.13(2)(a); and/or that the Second, Third and Fourth Defendants were corporate bodies who, there was reason to believe, would be unable to pay the Defendants' costs if ordered to do so, within the scope of 25.13(2)(c).
In response, the Claimants submitted that:3
- the First Claimant was resident within the Brussels/Lugano Zone, and the Defendants could if necessary enforce a costs award against his assets under the Brussels Regulation;
- there was no real prospect that any adverse costs order would go unsatisfied;
- any costs order against the Claimants would be fully enforceable within the Brussels/ Lugano zone;
- the claim against the Defendant's was bona fide with (at the very least) a reasonably good prospect of success; and
- providing security would cause the Claimants to incur costs.
The Court's approach
Having determined, notwithstanding a certain "lack of frankness" on the part of the First Claimant, that the First Claimant was resident within Greece, a jurisdiction mentioned in CPR 25.13(2), Mr Justice Henshaw held that the Court had no power to make a security for costs order against him. Addressing the issue of a party's residency, Mr Justice Henshaw made the following noteworthy observations:
- "The question of a person's residence…is one of fact and degree. A person is resident in a place for these purposes [i.e. purposes of determining residency in the context of CPR 25.13(2)] if they habitually and normally reside lawfully in that place from choice, and for a settled purpose, apart from temporary or occasional absences, even if their permanent residence or 'real home' is elsewhere"4;
- "a person may reside at more than one place and indeed in more than one jurisdiction"5; and therefore
- "in the absence of any more specific authority, and bearing in mind the rationale of the rule… a person who splits his residence between a Contracting State and a non-Contracting State, but who habitually and normally lawfully chooses to spend a significant part of his time living in the Contracting State, lawfully and for a settled purpose, is to be regarded as resident in the Contracting State for CPR 25.13(2)(a) purposes".6
With regard to the Second to Fourth Defendants, however, all of which were resident out of the jurisdiction, and not within a jurisdiction listed in CPR 25.13(2) (meaning that the Court prima facie had power to order security), Mr Justice Henshaw ultimately ordered that security be provided in the sum of £805,000 on the basis of condition (a) of CPR 25.13(2)).
Mr Justice Henshaw did not accept the Claimants' contention that the Defendants would be able to enforce a costs award against the Claimants' assets. Nor did he accept the Claimants' argument that there was no real prospect of any adverse costs order going unsatisfied and that a cost order against the Claimants would be fully enforceable within the Brussels/Lugano zone.7 In reaching his decision, Mr Justice Henshaw had regard to the following factors:
- the Claimants' lack of frankness about the First Claimant's country of residence;
- the Claimants' apparent reluctance to come forward with information about assets (other than gradually and belatedly);
- the lack of transparency and documentary evidence (i.e. accounts) in support of their position provided by the Claimants;
- the poor relations and apparent distrust between the parties;
- the offshore locations of three out of the four Claimants (and consequent lack of transparency as to these locations); and
- the ease with which it was likely that the Claimant's assets could be moved or sold.
The Nasser condition
As the Court's power to order security arose where only condition (a) in CPR 25.13(2) was established, it was subject to the so-called "Nasser Condition" – namely, that the power could only be exercised on grounds "concerning obstacles to, or the burden of, enforcement in the context of the particular foreign claimant or country concerned"8 (i.e. a defendant cannot solely rely on a claimant being out of the jurisdiction, but also has to demonstrate that there are obstacles making it difficult to enforce against the claimant's assets within the jurisdiction).
The Court found that the Nasser Condition was satisfied, due to the nature of the assets that the Claimants offered as security (which included, amongst others, real estate in Greece, a Cypriot-owned yacht berthed in Athens, shareholdings in various European companies, and funds in a Swiss bank account), but equally the lack of disclosure by the Claimants of its liabilities.9 This led the Court to determine that there was a real risk of the Claimant's assets being unavailable "if and when" the Defendants sought to enforce a costs order.10
The requirement of an inability to pay
Having established that there were grounds to order security on the basis of condition (a) in CPR 25.13(2), it was not strictly necessary for the Court to consider whether condition (c) was satisfied. Nonetheless, Mr Justice Henshaw made certain observations which are of interest.
In pleading their case, the Claimants challenged the Defendants' reliance on condition (c) in CPR 25.13(2); arguing that the Defendants had to persuade the court that there was "reason to believe" that the Claimant would have insufficient assets to satisfy a costs order, not merely that the claimant "may be unable" to pay, in accordance with the Court of Appeal authority in SARPD Oil v Addax11. While Mr Justice Henshaw considered the Claimants' argument to be correct, he did not consider that this should alter the approach to cases where condition (a) was also satisfied, subject to the Nasser Condition being satisfied (as in the present case).12 In addition, Mr Justice Henshaw observed that there could still be reason to believe that a company will lack the means to pay an adverse costs order, even if some information about assets has been provided, particularly if the information provided is unsatisfactory. Further, he did not consider that a defendant was required to establish a lack of probity, or "solid evidence of a risk of asset dissipation such as might justify a freezing order".13
Pisante and Brexit
The Pisante judgment comes at an interesting time. Under the rules applicable in that case, security for costs could not be ordered against a claimant by reason of the fact that he was resident out of the jurisdiction (i.e. pursuant to CPR 25.13(2)(a)) where he was resident in a Brussels Contracting State, a state bound by the Lugano Convention or 2005 Hague Convention on Choice of Court Agreements, or a Regulation State (i.e. an EU Member State subject to the Recast Brussels I Regulation (EU) No 1215/2012). That was on the basis that those instruments provided for sufficiently simple and effective enforcement in those countries of the costs judgment of an English court, such that an order for security was inappropriate and unnecessary.14 How might this be impacted by Brexit?
In the short term, the Recast Brussels I Regulation (for example) will continue to be applied by EU Member States to the enforcement of UK court judgments given in proceedings instituted prior to 1 January 2021. Consequently, the relevant restriction on the ability to apply in English proceedings for security for costs on the basis of the foreign residence of an EU claimant should continue to apply in such cases. Going forward however, it may be possible for a defendant to seek security for costs from a claimant resident in an EU Member State (or other Lugano State) on the basis of CPR 25.13(2)(a) if the 2005 Hague Convention is not applicable (assuming of course that the Nasser Condition, applied in the context of the particular foreign claimant or country concerned, can be satisfied). Whether that is so might depend, however, on any reciprocal enforcement arrangements that may be agreed between the UK and those countries now that the Brexit Transition Period has come to an end, including whether the UK is re-admitted in its own right to Lugano.
The Pisante judgment provides useful guidance as to how the Commercial Court will apply the rule in CPR 25.13(2) – particularly where only the condition at CPR 25.13(2)(a) is satisfied. In particular:
- The past and present conduct of a claimant may be a consideration when assessing whether or not it will be able to pay a future costs order. Where a claimant has not been fully transparent about its asset position (e.g. being reluctant to provide sufficient documentary evidence of its assets, or failing to do so) this will not play in its favour with the Court.
- Determining whether a claimant will be able to pay a costs order in the context of CPR 25.13(2)(a) is a forward-looking exercise. The question is not whether a claimant's assets can currently be enforced against, but whether there is a real risk that the assets may no longer be available if and when the need for enforcement arises. An example of an ongoing obstacle may be a claimant registered in a country that does not require companies to publish their accounts (e.g. BVI, where the Second and Third Claimants in this application were registered).
- The Court will consider a claimant's liabilities as well as its assets when determining whether or not it is able to satisfy a costs order against it.
- Where a claimant splits his or her time between multiple residences, the "residence" for the purposes of CPR 25.13(2)(a)(i) is the place they spend a significant amount of their time lawfully settled and living (in the present case evidence of this was the First Claimant having his familial home in Greece).
- Where conditions (a) and (c) of CPR 25.13(2) are satisfied, a defendant is not under an increased burden to prove that a claimant would have insufficient assets to satisfy a costs order.
6  EWHC (Comm) at 24. The meaning of "significant" for these purposes was not defined, but in this scenario the First Claimant spent more than half of their time in Greece, where he had a substantial family, home despite also spending time in New York and Switzerland.