Accountants and other professional advisers, forced into defending weak or speculative claims in court proceedings, may seek a security for costs order to protect them against the risk that the claimant will not have the financial means to pay their costs if the defence is successful. Security for costs ordered against an impecunious claimant company (or individual if a specific ground in CPR 25.13(2) applies) protects the defendant by requiring the claimant to provide funds or a bank guarantee to the court which is released to the successful party when the proceedings are concluded.

An application for security for costs can tactically and strategically focus the claimant's mind on the merits of the claim and the anticipated costs of continuing with the proceedings. It may encourage the claimant to settle promptly or discontinue its claim entirely if it cannot pay the security ordered by the court or raise funds from another acceptable source.

What is acceptable "security" to resist a defendant's application for security for costs has featured in recent case law. The following two cases consider the position where the claimant has after the event (ATE) insurance that could pay some or all of the defendant's costs.

Premier Motorauctions Ltd (in liquidation) v PwC and Lloyds Bank

The Court of Appeal held that whilst "an appropriately framed" ATE insurance policy could in theory provide sufficient costs protection to the defendant, the ATE policies in this case did not and the claimant was ordered to pay security.

The policies did not contain a general anti-avoidance provision which meant that the ATE insurers could seek to avoid coverage of the claims for non-disclosure or the misrepresentation of material information. Conspiracy was a central argument in the case and neither the defendant nor the court had been provided with any information to assess the likelihood that insurers may seek to avoid the policy.

Sandra Bailey & Others v GlaxoSmithKline UK Limited

The claimants had ATE insurance up to £750,000 in relation to the costs of the generic issues in the proceedings and the claimant's litigation funder, Managed Legal Solutions (MLS), contended that this was sufficient security to meet a realistic appraisal of GSK's costs, if successful. In the alternative, it argued that any security that it was ordered to pay should be limited to the current level of funding of £1.2m (known as the "Arkin cap").

As with Premier Motorauctions, the court could not discount entirely the prospect that the insurer may avoid the policy for non-disclosure or misrepresentation at some stage since there was no anti-avoidance clause.

It ordered security in the sum of £2.5m, being 50% of the court's "working figure" assessment of GSK's costs of £4.5m. It deducted two-thirds of the ATE policy cover (namely, £500,000) from the security to be provided to reflect the risk that the policy may not cover GSK's costs. MLS was, therefore, required to provide the net balance of £1.75m as security. While this exceeded the "Arkin cap", the court held this was only one factor to consider at the interim stage and there would be no injustice done if the trial judge ultimately applied the cap when determining costs.

Comment

These decisions highlight that even where claimants have the benefit of ATE policies which could in theory pay the defendant's costs, the courts are still open to ordering security of costs if there is a risk, which cannot be discounted as "illusory", that the insurers could avoid the policy for non-disclosure or misrepresentation, or the policy terms contain conditions precedent to the insurer's liability to pay under the policy. Since anti-avoidance clauses in commercial insurance contracts will be rare, ATE policies are unlikely to provide sufficient protection to defendants in most cases, and defendants should still apply for security for costs and challenge the availability of ATE insurance where appropriate.

These decisions will have implications for litigation funders that fund impecunious claimants. Commercial funders will not want to pay into court security that exceeds the level of funding agreed with the claimant. The absence of an Arkin cap in security for costs applications will, therefore, focus funders' minds on whether they wish to continue funding such claims and if they decide to withdraw funding, then claimants are likely to have to settle claims promptly or discontinue the proceedings altogether.