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Coronavirus and security for costs in court proceedings16th April 2020 Commercial Litigation
Coronavirus is set to continue to impact many aspects of our lives for the foreseeable future, including the justice system. The courts in England and Wales remain open and are anxious to adopt a ‘business as usual’ approach. There is already clear judicial authority that cases will not be adjourned simply due to the existence of Covid 19.
As we explain below, the dramatic change in the financial fortunes of many companies is likely to have an impact on many corporate litigants.
As a party to court proceedings, the general rule is that the unsuccessful party in the proceedings will pay the legal costs of the successful party. However, a perennial question we are asked is how can you guard against the risk of your opponent becoming insolvent during proceedings and being unable to pay your costs?
In certain circumstances where you are concerned that the other side may not be able to pay your legal costs, it is possible for the court to make an order for “security for costs”. This procedure is well-established, but we anticipate that the courts will see an increase in applications for security for costs.
This is very relevant for those involved in or contemplating litigation, as an adverse security for costs order which cannot be met could derail an otherwise good case. It is quite possible that the financial impact of the pandemic will mean that parties to litigation have concerns over their opponent’s ability to pay legal costs when previously that was not the case.
What does “security for costs” mean?
An order for security for costs is an order made by the court which requires one of the parties in court proceedings to pay money into court, provide a bond or provide a guarantee as security for the other party’s legal costs.
Security for costs applications are typically made by defendants, although there are some circumstances in which claimants can also apply to obtain security for costs over the defendant. The most relevant ground for present purposes is where the claimant is a company or body and there is reason to believe it will be unable to pay the defendant’s costs if ordered to do so.
If a company needs to take out an emergency state loan, is furloughing employees, deferring tax payments and obtaining rent holidays, it is not difficult to see how a successful application could be made.
Once the ground is established, the court will then consider whether it is fair to make the order. This involves a consideration of factors such as:
- Does the respondent to the application (usually the claimant) have the ability to comply with an order for security for costs?
- Does the claim have a good chance of success? In other words, how likely is it that the claimant is going to lose the case and be ordered to pay the defendant’s costs. This does not involve a mini trial of the case.;
- Would making the order prevent the claimant from bringing the claim? The court will be reluctant to make an order that will effectively prevent the claimant from being able to proceed with pursuing a genuine claim;
- Is the respondent to the application in a dire financial state because of the other party’s actions (i.e. if the claimant is making a claim against the defendant and is in a poor financial state, is that down to the actions of the defendant to which the claim relates? If so, it may be unjust to make an order for security for costs against the claimant);
- Has the applicant delayed in applying for security for costs? If so, it is likely that they will need to provide an explanation for the delay and the delay may prevent the court from agreeing to grant the order.
As stated above, consideration of a security for costs application, like all applications, should be made promptly. It is also something that should be considered in any pre action protocol period whether you are a claimant or defendant. Defendants in particular should make appropriate enquiries.