In the recent case of SARPD Oil International Ltd v Addax Energy SA and another [2016] EWCA Civ 120, the Court of Appeal made an order for security for costs against  an overseas company that had failed to provide information about its financial standing. This failure was sufficient to give the court reason to believe that the claimant would be unable to pay the defendant’s costs.

The decision is important because it reduces the scope for claimants to refuse, for tactical reasons, to provide information about their ability to pay a defendant’s costs. Defendants are now in a stronger position to demand that claimant companies provide financial information (where no such information is publicly available) and to use a refusal to provide such information as a basis for applying for security for costs.

WHAT IS SECURITY FOR COSTS?

If a defendant is concerned that it will be unable to recover its costs from a claimant (if it defeats the claim), it can in some circumstances apply for an order for security for costs. Such an order compels a claimant to give security, often by depositing money into court or by providing a form of guarantee, for the defendant’s costs before it is allowed to continue with its claim.

BACKGROUND TO THE SECURITY FOR COSTS  APPLICATION

The claimant, SARPD Oil International Limited (SARPD), was a company incorporated in the BVI which had bought a quantity of gas oil from the defendant, Addax Energy SA (Addax), a company incorporated in Switzerland. SARPD issued proceedings against Addax, alleging that the oil did not meet the contractual specification and claiming damages or an indemnity. Addax denied that the oil did not meet the specification but argued that, if it did not, then it was the fault of Glencore Energy UK Ltd (Glencore) from whom it had bought the oil on back-to-back terms. Addax brought Part 20 proceedings against Glencore for damages or an indemnity in respect of SARPD’s claim.

Addax sought an order from the High Court that SARPD give security for Addax’s costs in respect of the proceedings.  CPR  Part 25.12 provides that the court may make an order for security for costs if it is satisfied that it is just to do so and one or more relevant condition applies.   CPR Part 25.13 sets out   the conditions which include: “the claimant is a company or other body (whether incorporated inside or outside of Great Britain) and there is reason to believe it will be unable to pay the defendant’s costs if ordered to do so”.

In its application, Addax argued that this condition was satisfied because SARPD had said nothing about its financial position  and Addax had access to little information and did not know whether SARPD had any assets against which an order could be enforced. SARPD did not have any publicly accessible accounting records as companies in the BVI do not have to keep such records or make them publicly available.

THE COMMERCIAL COURT AT FIRST INSTANCE

The judge at first instance found that SARPD had been deliberately reticent about providing information as to its financial standing but that there was no reason to believe SARPD would be unable to pay Addax’s costs if ordered to do. SARPD’s reticence was because it would benefit in settlement negotiations if Addax had doubt as to whether it would recover its costs even if it defeated the claim but there was no reason to suppose SARPD couldn’t pay the costs. The judge added that he suspected that it had become a practice of the Commercial Court to order security for costs in circumstances where a company had not filed publicly available accounts, had no discernible assets and declined to reveal its financial position. In the judge’s view, this practice was not justified and he said he would not follow it.

THE COURT OF APPEAL’S VIEWS ON SECURITY FOR COSTS

The Court of Appeal disagreed with the judge.  It examined the relevant case law and concluded that when determining an application for security for costs, the court must simply have reason to believe that a claimant will not be able to pay the defendant’s costs if the claimant loses.  This is a matter of evaluation for the judge. However, the Court of Appeal found that in this instance the judge was plainly wrong in his findings and the Court of Appeal could therefore interfere with his decision.

Lord Justice Sales delivered the Court of Appeal’s judgment and held that if a claimant company is given every opportunity to show that it can pay a defendant’s costs and deliberately refuses to do so, there is every reason to believe that it will be unable to pay the defendant’s costs. He stated that it was “illogical and unacceptable” to allow SARPD to give Addax reason to believe it would be unable to recover its costs (to help SARPD in settlement discussions) but at the same time  to assert there was no reason for the court to believe it would be unable to do so.  He concluded that if there is a practice  of 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 this practice is, in the view of the Court of Appeal, a sound one. Sales LJ added that,   if a claimant has legitimate business reasons for keeping its financial information confidential, it can make an application for the court to sit in private or to avoid referring in public to relevant financial amounts.

The Court of Appeal also found that the costs incurred in the Part 20 proceedings against Glencore would be Addax’s costs in respect of which it ought to obtain security. This was because,  if  Addax  successfully  defeated  SARPD’s  claim,  it would inevitably be unsuccessful in its Part 20 claim against Glencore. In those circumstances, it was likely that Addax would be liable for Glencore’s costs but would be able to recover them from SARPD. In the Court of Appeal’s view, all of these costs should therefore be covered by the security.

Finally, the Court of Appeal confirmed that the approved costs budget of Addax was the appropriate reference point for calculating the amount of Addax’s costs which should be provided by way of security. SARPD argued that the court should go behind the approved costs budget and  examine whether the costs incurred were reasonable and proportionate.

The Court of Appeal noted that the court does not formally approve the incurred costs element of a costs budget but  only the estimated costs element. However, the court can still comment on the incurred costs and consider them in assessing the reasonableness and proportionality of the estimated costs and any such comments will also carry significant weight when the court comes to exercise its general costs discretion at the end of the trial. The Court of Appeal found that parties coming to the first CMC to debate their respective costs budgets know that this is the appropriate occasion on which to contest any items in those budgets – both incurred and estimated. SARPD chose not to do this and there had been no relevant change to circumstances since the CMC. It was therefore contrary to the overriding objective to allow SARPD to try to re-open costs issues which it had already had a fair opportunity to address. The Court of Appeal therefore used the costs budgets as the relevant reference points and made an order for security for costs   against  SARPD.

COMMENT

Claimant companies incorporated in the BVI, or in other countries where there is no obligation to provide publicly available financial information, should be aware that if they hide behind such rules and fail to provide information as to their ability to meet a defendant’s costs, the court will likely rely on this as reason to believe that they will not be able to pay the defendant’s costs and will make an order for security for costs. In making such an order, the court will refer to any approved costs budgets in the case.  Therefore, any issues that a party  has with the other side’s costs budget should be raised in the first CMC, before the court approves the costs  budgets.