The general rule is that the unsuccessful party to litigation pays the costs of the successful party. However where a defendant has a reasonable apprehension that the plaintiff will be unable to pay the defendant’s legal costs, the defendant can apply to court for an order that the plaintiff lodge a fixed amount of money to Court as security against the defendant’s costs. Irish courts are hesitant in granting such orders as they may hinder a genuine claim progressing simply because of the financial standing of the plaintiff. The courts must balance the constitutional right of access to the courts and a defendant’s right to be protected from the risk of successfully defending a claim but not recovering the costs of that defence. Security for costs will not be ordered against a personal plaintiff who resides in the EU and consequently the majority of applications relate to corporate plaintiffs. However, when successful, an order for security for costs often discourages a claim from proceeding further, particularly a claim where the plaintiff views the defendant, or more often the insurer, as having “deep pockets”.

In this particular dispute the plaintiff, a limited company, claimed that the defendant, its solicitor, was professionally negligent in failing to act on instructions to close a sale of land resulting in significant loss. The defendant solicitor alleged that the plaintiff was never in funds to close the sale. Company accounts showed that there was a significant sum available to the plaintiff however the notes to the accounts showed that the sum related to the High Court proceedings and were only an indication of how much the plaintiff hoped to recover from these proceedings rather than actual funds held by it. As such, the plaintiff had no real assets and would not be able to discharge a costs order. Having regard to the plaintiffs impecuniosity, the defendant made an application under section 390 of the Companies Act 1963 for security for costs which came before Judge Hogan.

In considering the application, Hogan J made reference to the recent decision by Clarke J in James Elliot Construction Co Ltd v Irish Asphalt Ltd [2010] IECH 234 when he summarised the legal principles governing the courts discretion to grant such an order as follows:

“a defendant … must establish two things. First, the defendant must establish a bona fide defence and second, the defendant must produce credible evidence to the effect that the plaintiff would not be able to discharge costs in the event that the defendant was successful and awarded its costs. If both of these matters are established then the onus rests on the relevant plaintiff to establish special circumstances…”

Taking each of these principles in turn, Hogan J concluded the defendant had established a prima facie defence and noted that the plaintiff had not put forward any evidence to show that it was in a position to close the transaction before the expiration of a completion notice. Additionally, Hogan J commented that both parties accepted that the plaintiff was unable to discharge the defendant’s costs. Given that the defendant successfully met the first two criteria, the burden shifted to the plaintiff to establish that some “special circumstance” existed as to why no such order for security should be made. 

The special circumstance relied on by the plaintiff was that its impecuniosity was caused directly by the negligence of the defendant. In considering this argument, Hogan J referred to Connaughton Road Construction Ltd v Laing O’Rourke (Ireland) [2009] IEHC 7 who summarised the approach taken by the Supreme Court in Usk and District Residents Association Ltd. In Connaughton Road Clarke J set down four propositions that the plaintiff must establish to prove that special circumstances exist and thereby avoid an order for security for costs:

  • That there is actionable wrongdoing on the part of the defendant;
  • there is a causal connection between the actionable wrongdoing and a practical consequence or consequences of the plaintiff;
  • that the consequence(s) referred to in (2) have given rise to some specific level of loss in the hands of the plaintiff which loss is recoverable as a matter of law; and
  • that the loss concerned is sufficient to make the difference between the plaintiff being in a position to meet the costs of the defendant in the event that the defendant should succeed, and the plaintiff not being in such a position.  

Judge Hogan was prepared to accept that the plaintiff met the first proposition that an actionable wrongdoing on the part of the defendant was established by assuming, for the purposes of the application, that the defendant was negligent.  However, in relation to the second proposition, Hogan J referred to the fact the plaintiff company failed to establish a causal connection between the actionable wrongdoing (the defendant’s negligence) and a practical consequence for the plaintiff (the alleged loss of value of the lands). The plaintiff had put forward no evidence to suggest that the defendant’s negligence was the cause of the alleged loss to the plaintiff as the company itself was unable to  raise the necessary funds to close the sale. There was nothing to suggest the defendant was either responsible for the lack of funding or that she contributed to this by some act or omission. As the plaintiff could not bring itself within the second proposition, Hogan J noted that the plaintiff was therefore unable to satisfy the four requirements necessary to establish that special circumstances exist.

The plaintiff also attempted to argue that the defendant was precluded from seeking security by reasons of delay however having regard to how the proceedings progressed Hogan J noted that any delay by the defendant was not material and had not prejudiced the plaintiff.

In considering each of the legal principles, Hogan J granted the defendant’s application and directed the plaintiff to provide security “in the manner envisaged by s 390 of the 1963 Act”. The Supreme Court in Lismore Homes Limited (in receivership) and Bank of Ireland Finance Limited & Others [2001] previously confirmed that the one-third rule (in which the plaintiff was only obliged to lodge one third of the estimated legal costs) did not apply to corporate plaintiffs and that the plaintiff was required to lodge the actual costs likely to be incurred by the defendant. Hogan J put a stay on the proceedings until security was lodged in the Office of the Accountants in the High Court.

It is clear, in conclusion, in considering security for costs applications under section 390 of the Companies Act 1963, the courts must use its discretion to balance the right of a defendant to recover costs against the plaintiff’s right to access to the Courts (notwithstanding its financial status). However, where a defendant can bring itself within the legal principles set out above, the Courts may exercise their discretion to put a stay on proceedings until such time as the plaintiff lodges security and thereby shares a portion of the risk associated with the case. In the appropriate circumstances this often provides the defendant with a fatal blow to a plaintiff!