Security For Costs: Is Attack The Best Form Of Defence?

There are a host of tactical considerations to weigh up when a defendant wants to do more than merely defend a claim and decides to add counterclaims to his defence. One of the biggest considerations may be the risk of a successful security for costs application by the claimant.

The purpose of the security for costs regime†is well known: to ensure that a party which†is on the offensive makes provision to the†court's satisfaction for any costs order if he†is unsuccessful at the end of the case. The†regime applies particularly to companies†under s726 of the Companies Act 1995 and†under the Civil Procedure Rules (CPR).

Typically orders for security for costs are†made against claimants. However†defendants are not immune and a claimant†faced by a counterclaim made by a†defendant who might struggle to pay costs†if the counterclaim fails, will give careful†consideration to the possibility of forcing†the counterclaiming defendant to provide†security for costs in the form of a payment†into court or a satisfactory bond/guarantee.†Counterclaiming defendants should†therefore be aware of this risk. Hence the†question, is attack always the best form of†defence?

This area of the law was considered in†Thistle Hotels Ltd v Orb Estates et al (3†February 2004).

In a share sale agreement in March 2002†between Thistle and Orb, 37 out of†Thistle's 55 hotels were transferred to Orb.†Thistle continued to manage the hotels†pursuant to an operating and relationship†agreement. Disagreements arose over†aspects of the share sale agreement in†relation to managing intra-group debt in a†technical payment mechanism and this led†to Thistle instigating proceedings.

The position of Orb itself was settled by†consent but two of the defendants, Gamma†Four Ltd ('Gamma') and Euro and UK†Property Ltd ('Euro'), both companies†within the Orb group, chose to defend the†claims against them and launched†counterclaims based on breach of warranty†and misrepresentation. Thistle applied†under CPR Part 25.12 for security for costs.

The conditions to be satisfied are set out in†Part 25, and form two separate tests. One†must first show that the party falls into an†exhaustive category which lists scenarios†where the payment of costs would be†unlikely to be forthcoming or not easily†obtainable. In the usual type of case,†security is ordered against an impecunious†company or one which is resident out of†jurisdiction such that there would be†additional costs in enforcing a costs order.†As a...