An important consideration for all defendants in litigation is the issue of costs. A defendant can try to limit its exposure to litigation costs by making a payment into court for the plaintiff’s consideration in satisfaction of the claim. Such payments are commonly known as lodgements. If the plaintiff continues with the litigation and wins the case but fails to obtain an award in excess of the amount lodged to court, i.e. fails to “beat” the lodgement, the plaintiff will generally have to pay the defendant’s costs from the date of the lodgement.
Separately, if there is a concern that a corporate plaintiff might not have the means to pay a successful defendant’s costs, a defendant can apply for an order for security of the costs of the action. Section 390 of the Companies Act, 1963, now Section 52 of the Companies Act 2014, says that a defendant to legal proceedings can apply to the court for such an order where there is credible testimony that there is reason to believe that the plaintiff company will be unable to pay the costs of the defendant if successful in its defence. Proceedings will usually be stayed until security for the defendant’s costs is given. If security cannot be given, the proceedings will come to an end.
In the case of Pagnell Limited (Trading as Snap Printing) v O.C.E. Ireland Limited , the plaintiff company, Pagnell Limited, sought damages for premature and unlawful termination of a contract to provide printing services to the defendant, O.C.E. Ireland Limited. The defendant made a lodgement and then successfully applied to the High Court for an order for security of costs. The plaintiff appealed the order on the basis that the defendant did not have a prima facie defence. It argued that the defence lacked bona fides following the decision to make a substantial lodgement. Counsel for the defendant argued that no inference regarding the bona fides of the defence could properly be drawn from the existence of such a lodgement.
Judge Hogan in the Court of Appeal considered previous case law on security for costs orders made under Section 390. He gave particular attention to Judge Clarke’s judgment in the case of Connaughton Road Construction Limited v Laing O’Rourke Ireland Limited IEHC 7. In that case, it was held that absent special circumstances where the court should exercise its discretion, such an order should be made if the defendant proves to the satisfaction of the court that it has a prima facie defence to the claim and that the plaintiff company would not be able to pay the defendant’s costs in the event of a successful defence.
Having considered the Connaughton Road ruling and the facts presented in this case, Judge Hogan ruled that the security for costs order should be set aside. In particular, the court considered the effect that the lodgement had on the defendant’s contention that it had a prima facie defence. The court acknowledged that lodgements are made for a variety of reasons, and in some circumstances, a small lodgement is made for undeserving claims on a purely practical, economic basis. The court also acknowledged that the lodgement made by the defendant in this instance of €50,000 was “but a fraction”of the claim for €400,000. Nevertheless, the court considered the offer to be a significant sum which amounted to tacit acknowledgement by the defendant that the plaintiff’s claim was one of substance that was likely to succeed, at least in substantial part.
Judge Hogan held that the making of the lodgement amounted to special circumstances which justified the court exercising its discretion to set aside the security for costs order.
Judge Hogan’s ruling in Pagnell makes the prospect of a defendant successfully applying for an order for security for costs against a plaintiff unlikely where the defendant has already made a lodgement or, although not directly considered by the court in the case, an open settlement offer.
Making a lodgement can often encourage settlement and the sooner the lodgement is made the greater its impact in maximising protection in relation to costs. It can also incentivise the plaintiff to try to settle the matter at an early point in the proceedings. However, defendants who are minded to make a lodgement or an open offer in writing would be well advised to carefully consider the impact such a step will have on any subsequent application they might wish to make for security for costs. Encouraging settlement and maximising costs protection makes sense, but not if it comes at the price of losing the right to obtain a stay on proceedings pending the plaintiff giving security for costs. Such a stay can potentially deal a fatal blow to an impecunious plaintiff’s case.