A recent case highlights the discretion a court can use when considering applications for security for costs.
On occasion, parties engaged in court proceedings will consider procedural tactics with the ultimate intention of exerting such pressure on their adversaries that their weakened position, or even inability to pursue the proceedings, will work to their advantage. Such a situation arose in (1) Deleclass Shipping Co. Ltd (2) MWI Shipping Services Ltd v Ingosstrakh Insurance Co. Ltd (2018) where the defendant’s application for security for costs became very problematic for the claimants. Clyde & Co (Fanos Theophani [partner] and Natalie Johnston [associate]) acted for the successful claimants.
The claimants’/shipowners’ vessel was declared a constructive total loss after it was involved in a collision and sank. The vessel had been insured by the defendant insurance company, Ingosstrakh Insurance Co. Ltd.
Following the collision, a third party appeared and claimed they were entitled to the insurance proceeds, alleging they were the beneficiaries of two assignments. The shipowners denied this and claimed the third party’s case was false and fraudulent.
In view of the competing claims, the insurance company decided it would only pay the proceeds following a court order. In the event, the third party claim was struck out by the Court. The insurance company, nevertheless, took the view that the claimants were not entitled to the insurance proceeds for the reasons given by the third party who’d had their claim thrown out.
It was obvious that the application for security for costs was intended to stifle the shipowners’ genuine claim
Both parties applied for security for costs under CPR r.25.12. It was accepted that the claimants might not be able to pay the defendant’s costs if ordered to do so. If the application for security for costs was allowed by the Court, claimants argued, it was likely to stifle their ability to continue with the proceedings.
The insurers’ decision to adopt the third party’s claim, notwithstanding it being struck out, was highly unusual and contrary to their previously pleaded case; it was obvious that the application for security for costs was intended to stifle the shipowners’ genuine claim. Where an order for security for costs might result in the oppression of a claimant, meaning that the claimant would be forced to abandon a claim which had a reasonable prospect of success, the Court could refuse to make the order despite the possibility that, if unsuccessful, the claimant would be unable to pay the defendant’s costs. The Court would need to be satisfied that it was probable that this was the case, and it fell on the claimant to show that there was no prospect of raising funds from any outside source.
For this purpose, the Court had to take various factors into consideration:
Suggestions that funds could be sourced from the controlling shareholder of the claimant company, which had a distinct legal personality, were generally not satisfactory. This was not equivalent to money being raised by the claimant itself;
Where the claimants’ financial position resulted from the defendant’s failure to abide by the parties’ agreement, security for costs should not be ordered. In those circumstances, the claimant would not be required to have a strong claim on the merits;
The Court would not usually consider the merits of a claim unless there was a high degree of probability of success or failure and, even so, an assessment of the merits was strongly discouraged (Commercial Court Guide paragraph 4); but
An impecunious party would not be allowed to use its inability to pay to put unfair pressure on a more prosperous party.
The Court had to consider both injustice to the claimants and the fact that the defendant may not be able to recover its costs.
Taking a decision
In this instance, the Court found that the claimants had an arguable prima facie case, although it was unable to determine whether the case in itself was very strong. Various elements illustrated the precarious financial position of the claimants: they were not trading, had limited assets, were unlikely to raise funds from the shareholders, and faced difficulty in financing the proceedings. Also, the first claimant did not have a bank account and the second claimant had gone out of business. They were unable to provide security. The Court stated that, although there was a dispute as to quantum, the defendant’s failure to pay under the insurance policy had been a contributing factor to the claimants’ financial predicament. In addition, the defendants’ adoption of the third party’s claim was seen as an apparent tactic to circumvent a payment altogether.
The Court concluded that an order for security was likely to stifle the claim and refused the defendant’s application for security for costs:
The claimants were in a poor financial position, as described above.
The claimants were not unfairly using impecuniosity to put pressure on the defendant.
The Court also turned down the claimants’ application.
This case illustrates the discretion available to the Court when considering applications for security for costs and the many factors they will take into account to make sure that no injustice is done to a party which is in a financial tight spot, whilst still bearing in mind the other party’s position.
Fanos Theophani and Natalie Johnston are Partner and Associate respectively at Clyde & Co, a global law firm focusing on the marine, energy, trade, infrastructure, aviation and insurance sectors. To contact Mr Theophani, call +44 (0) 207 876 4961 or email email@example.com.