The Court of Appeal has recently confirmed that security for a defendant's costs will often be granted against a foreign company who is not obliged to publish accounts, has no discernible assets and declines to reveal anything about its financial position: SARPD Oil International Limited v Addax Energy SA & Another [2016] EWCA Civ 120.

The decision suggests that claimants should consider carefully whether to provide information about their financial standing when faced with a request for security for costs, as reticence on the matter may result in an order to provide security.

The decision is also a reminder that an order for security for costs may, in some circumstances, include the costs of third party proceedings brought by the defendant. It also contains interesting comments regarding the relevance of the parties' agreed or approved costs budgets in setting the amount of the security. Jade Hu, an associate in our dispute resolution team, considers the decision further below.

Background

The claimant, a company incorporated in the British Virgin Islands, alleged that gas oil the defendant supplied did not meet the contractual specification. The defendant denied the claim but said that, if the oil failed to meet the specification, it was the fault of Glencore Energy UK Ltd ("Glencore") from whom it bought the oil on essentially back to back terms. Accordingly, the defendant brought Part 20 proceedings against Glencore for damages or an indemnity in respect of the claimant's claim.

The defendant applied under CPR 25.13(2) for an order that the claimant give security for its costs of the proceedings, relying on the condition at sub-paragraph (c) of that rule, namely:

"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". 

At first instance, the Commercial Court refused the application. The judge held that, on the state of the evidence, there was no reason to believe the claimant would be unable to pay the defendant's costs if ordered to do so. He said the obvious explanation for the claimant's reticence about its financial position was that it would benefit in settlement negotiations from the defendant's doubt about whether it would recover its costs even if it defeated the claim. The judge noted that he suspected it had become the practice of the Commercial Court to order security where a company had not filed publicly available accounts, had no discernible assets and declined to reveal its financial position; but that if such practice had developed, it was not justified and should not be followed.

On appeal, the questions for the Court of Appeal were:

  1. whether the judge was justified in not following what he suspected was the practice of the Commercial Court;
  2. if security for costs was ordered, whether it should include the costs of the Part 20 proceedings including the defendant's potential costs liability to Glencore; and
  3. the relevance of the approved costs budgets in determining the amount of security ordered.

Decision

In relation to the first question, the Court of Appeal held that the Commercial Court judge had been plainly wrong to refuse the application. Lord Justice Sales, who gave the judgment of the court, said:

"If a company is given every opportunity to show that it can pay a defendant's costs and deliberately refuses to do so there is, in our view, every reason to believe that, if and when it is required to pay a defendant's costs, it will be unable to do so".

If there was a practice in the Commercial Court that security for costs will often be granted against a foreign company who is not obliged to publish accounts, has no discernible assets and declines to reveal anything about its financial position then, Sales LJ said, "that practice is a sound one and…we would uphold it."

In relation to the second question, the Court of Appeal held that the security should include the defendant's costs of suing Glencore as well as its potential liability for Glencore's costs. This was because, by the time the court made its final order as to costs, it would have determined (if the claimant lost) that Glencore had won as against the defendant. It would inevitably order the defendant to pay Glencore's costs, and it was highly likely that the defendant would be entitled to recover those costs from the claimant.

As regards the third question, the claimant argued that the defendant's incurred costs, as stated in its costs budget, were too high. Accordingly, the court should go behind the approved costs budget when determining the amount of security and examine for itself whether certain incurred sums were reasonable and proportionate.

The Court of Appeal noted that the court can only formally approve the estimated costs element of the budget, and not the incurred costs, under CPR 3.15(2). However, when approving a costs budget, the court may record its views on whether incurred costs are reasonable and proportionate, and such comments will carry significant weight when the court comes to making a costs order at the end of trial.

Here, the effect of the court's order in relation to the parties' costs budgets was that the estimated costs were approved and the court agreed that the incurred costs stated in the budget were reasonable and proportionate. The Court of Appeal said the effect of this comment was that it was likely that the incurred costs element would be included in any standard assessment of costs at the end of the day, unless good reason was shown why it should not be. Therefore, the correct approach was to take the defendant's and Glencore's approved costs budgets as the appropriate reference point for determining the amount of security the claimant should provide.

Comment

The decision is a reminder to claimants to consider carefully any request for information regarding their financial position, in the context of a potential application for security for costs. As this case suggests, an absence of relevant evidence from a claimant (as the only party who is able to provide it) may give the court reason to believe that the claimant will not be able to pay the defendant's costs if the claimant loses, resulting in a security for costs order. If the defendant has brought Part 20 proceedings against a third party, the claimant may in some circumstances be ordered to provide security for costs in relation to those proceedings as well – which may include both the defendant's own costs and its potential liability for the third party's costs.

The Court of Appeal also noted that although, in making a costs management order, the court cannot formally approve costs already incurred, any comments to the effect that such costs are reasonable and proportionate may have the same practical effect as the formal approval of the estimated costs. In particular, it is likely that such costs will be included in any standard assessment of costs at the end of the case, unless there is a good reason not to. Parties should therefore seek to raise any objections as to the reasonableness and proportionality of incurred costs included in an opponent's budget at the earliest opportunity (normally the first case management conference) and in any event before costs budgets are approved.