In litigation, the usual position in relation to costs is that the losing party has to pay the successful party. Sometimes the defendant has concerns about the claimant’s ability to pay their legal costs in the event that the claim is successfully defended. In those instances, the defendant may be able to apply to the court for an order for security for costs.
An order for security for costs means that a claimant is required to pay a sum of money up front in respect of the defendant’s costs, usually into court. It usually suspends the proceedings until security is provided and if security is not given the claimant’s claim is struck out. Security for costs therefore provides an element of predictability for a defendant in the event that they are ultimately successful.
Only defendants can apply for security for costs and an order will only be granted if the claimant:-
- Is resident out of the jurisdiction; or
- Is a company and there is reason to believe that it is insolvent; or
- Has taken steps to evade the consequences of litigation and enforcement.
Claimants have previously argued that where they have an after the event (ATE) insurance policy to cover the cost of the litigation then that should be sufficient security for the defendant’s costs. However, in Catalyst Managerial Services v Libya Africa Investment Portfolio the High Court recently held that that was not the case.
The defendant was an investment portfolio of the Libyan Government. The claimant and the defendant had entered into various contracts for the claimant to provide management services and development. The claimant alleged wrongful termination of the contracts and sought substantial damages from the defendant as well as claiming $15m in unpaid invoices. During the proceedings the defendant applied for an order for security of its costs.
The court found that there was a real risk that the claimant was insolvent as it had no assets apart from the claim itself. It was likely that, upon the claimant’s insolvency, the ATE policy proceeds would go to unsecured creditors and would not be available to pay the defendant’s costs. The judge ruled that the ATE insurance policy could not be considered as being satisfactory security if the defendant risked becoming an unsecured creditor in a foreign insolvency. The judge also decided that there was a significant risk of avoidance of the policy by the insurers because (1) the defence in part rested on an allegation of forgery against the claimant and (2) it would be possible to argue that the claimant had misrepresented the facts to them.
This case illustrates that for an ATE insurance policy to be satisfactory security, it must give the defendant sufficient protection in terms of scope and amount of cover, risk of avoidance and the diversion of funds.
If you are involved in any litigation then Blacks Solicitors can assist. Please contact Luke Patel on 0113 227 9316 or email him at “LPatel@LawBlacks.com”.