Security for costs: Life after the Court of Appeal’s decision in Motorauctions

We recently reported on the much awaited decision of the Court of Appeal in Motorauctions v Pricewaterhouse Coopers, a case in which the Court considered whether to order security for costs, where the claimant had an After-the-Event (“ATE”) insurance policy in place. Although Motorauctions provides clarification on the requisite scope and wording of ATE policies, the circumstances of individual cases will always be relevant to the Court’s decision of whether to award security for costs.

In two recent decisions, coming within a week of one another, the QBD of the High Court has considered whether it is appropriate to grant security for costs. In summary, the Court held that:

• Claimants should consider whether ATE insurance might be provided as security for costs when initially responding to a security for costs application. It is likely to be difficult to substitute in ATE insurance as security at a later date.
• The merits of the claimant’s case will not be considered in detail in a security for costs application, unless the claimant can demonstrate a high degree of probability of success. Where the case is likely to turn on the oral evidence, this test is unlikely to be satisfied.

Can an ATE policy be substituted for an undertaking giving security for costs?

In Recovery Partners GB Ltd and another v Rukhadze and others [2018] EWHC 95 (Comm) (24 January 2018), the Court considered whether previously ordered undertakings for security for costs (granted in 2017), backed by over £500,000 in cash, could be released in exchange for an ATE litigation policy indemnifying the claimant for the defendant’s costs, together with a deed of indemnity in favour of the defendants. Essentially, the claimant sought to revisit the security for costs order, to substitute the basis on which it was provided.

The Judge first considered whether the Deed of Indemnity, together with the ATE policy and the offer of an endorsement and a deed of charge, provided adequate security. He held that it did. Had the claimant proposed this form of security when security for costs were initially considered in 2017, it would have been accepted.

The more difficult question was whether there had been a “material change of circumstances” such that it was appropriate to release the undertaking given by the claimant’s solicitors, in lieu of security of costs. The Judge held that there had not been. The mere availability of an insurance policy does not provide grounds for releasing the undertaking. In reaching this decision, relevant factors included:

•  How long the security had been in place and whether the costs secured had been incurred.
• The extent of any difference in quality between the old, and the proposed, security.
• The strength of the explanation for the change of position. In particular, whether declining the change would cause the claimant hardship or prejudice, or inhibit its ability to pursue its claim.

In this case, the claimant did not satisfy the Court that their solicitors should be released from the undertakings and so the application was dismissed. The claimant was not entitled to “wind back the clock and substitute for the security in fact given a different form of security”.

The take-home for those involved in litigation is to always consider whether ATE insurance might be provided for security for costs when initially responding to a security for costs application. The threshold for substituting in such security at a later date is high.

Are the merits of a claim relevant in ordering security for costs?

In Bluewaters Communications Holdings LLC v Bayerische Landesbank Anstalt Des Offentlichen Rechts and others [2018] EWHC 78 (Comm) (18 January 2018), the claimant argued that the Court should exercise its discretion in not ordering security for costs because i) the strong merits of its claim made this a case in which security is inappropriate; ii) several of the defences put forward had been rejected in earlier proceedings; and iii) the application had been advanced in an oppressive manner.

In reaching its decision, the Court reiterated that the merits of the claim would not be considered in detail, unless a high degree of probability of success can be demonstrated (following the 1995 case of Keary Developments Ltd v Tarmac Construction Ltd).

This case was both factually and legally complex. Therefore, although the Judge acknowledged that there were weighty considerations in the claimant’s favour, including findings in earlier proceedings, ultimately the key issues in this case (those involving the allegations of fraud) would depend upon oral evidence. He was not sufficiently certain of the claimant’s success to refuse to grant security.

The Court also considered a stand-alone point, that of whether it was inappropriate to delay seeking security until shortly before the defences were served. He held that it was not. It was reasonable for the defendant to undertake most of their defence work, and wait for the issues to crystallise by way of exchange of initial detailed pleadings, before asking for security. Security had been sought before the CMC, in accordance with the Commercial Court Guide.

The case reiterates the Court’s reluctance to refuse security for costs on the basis that the claimant has a strong case. This is particularly the case where there are questions of fact at stake that will require a detailed assessment of the evidence, and also oral evidence at trial.