If your business is being taken to court by a business or individual, you will naturally be concerned about the legal costs you will need to incur – even if you are confident of successfully defending your position in the dispute.
It is usual for whoever is successful in court to ask for their legal costs to be paid by the losing party. If you consider that there is a risk that the other side may not have sufficient money to cover those costs, then your solicitor may advise you to make an application to court for ‘security for costs’. This is an application that forces the party bringing a claim against you to pay a sum into court that can be used to pay your costs in the event that they are unsuccessful. Note, however, that it is not guaranteed that you will be awarded all of your costs.
‘This reduces the risk that you cannot later recover your legal costs because the other side does not have the funds to pay them,’ says Kiran Solanki Solicitor at Crane and Walton Solicitors LLP. ‘In addition, an order for security for costs might have the effect of suspending the case against you until payment is made into court, or suitable security is given by your opponent. This will help focus their attention on the potential consequences of losing, and may make them think twice about pursuing you at all.’
Kiran Solanki looks at when an application for security for costs might be suitable, and how to go about making this type of application, using the example of a pasta sauce manufacturer and supplier accused of causing an outbreak of food poisoning by supplying out-of-date sauce to a chain of restaurants.
What is it and when is it appropriate?
Any party initiating a court case (the restaurant chain in this case) will usually have assessed the potential costs and risks of losing the case before taking any action in court.
In contrast, if you are the sauce supplier you will not have had the benefit of being able to consider the likely costs and risks before being included in court proceedings, and must incur legal fees in order to defend your position. These costs could be very high in this type of scenario, as it may be necessary to engage an expert witness to prove the sauce was not out of date and a scientist to show that the food poisoning was not caused by your product, but was caused by other food sold by the restaurant. This, on top of all of the usual legal fees in defending a claim at trial, can be prohibitively expensive, and you need to be assured these will be paid by the other side when you are successful in defending your product.
If you find yourself in this position, it is possible to ask the court to order that the restaurant chain makes a payment into court of a specific sum, or provide a bond or guarantee as security for your legal costs. The money, bond, or guarantee will be secured by the court pending the outcome of the matter.
What type of security for costs order might you obtain?
When deciding on an appropriate order, the court will assess the level of protection needed against the risk of stifling the case altogether – for example, if the restaurant chain does not have the cash flow required to make a suitable payment into court.
The court can order either:
- Money – If the restaurant chain is ordered to pay a specific sum into court, such an order is also likely to include sanctions for non-compliance (see below). Depending on the circumstances and the amount, a court might order the restaurant chain to make payment by instalments rather than one lump sum. This security might also only cover costs limited up to a certain point in time, rather than all the way to trial.
- Security – Alternatively, a court might order that security be given, such as via a personal guarantee by directors of the restaurant chain.
- Bond – this could be a written promise made, usually by a financial institution, on behalf of the restaurant chain, to pay your costs up to a specified sum if ordered. You can then call on the bond if the restaurant chain does not pay your costs if ordered to do so.
The amount to be paid will be subject to many considerations. You will have to estimate what you think your final costs might be, but the court will also use its own experience to decide how accurate this estimate may be, and whether this should be offset by any additional matters.
Who can apply for security for costs?
Any party defending a claim can apply for security for costs. However, your opponent may also be able to apply for security for costs against you, if you responded to them with a significant counterclaim.
For example, you might say that your sauce company has suffered significant reputational damage because the restauranteurs publicly stated that your sauce was the cause of a food poisoning outbreak. Then, the court might consider if both parties should be subject to a security for costs order in that case, or perhaps neither, to avoid one party being prejudiced compared to the other. It will depend on the circumstances.
Who can you ask for security for costs against?
While this would usually be ordered against the restaurant chain who initiated the case, it is also possible to apply for security for costs against anyone else that might be providing funding to them, including a professional litigation funding provider.
When and how do you apply?
It is important that you make your application as early as possible in the proceedings. The later you leave it, the less likely it is that it will be ordered, and it could be less than you requested. The potential risk, or not, to all parties usually becomes clearer as the case progresses.
It would be usual for your solicitor to make an application at one of the first case management conferences in court, if not before. It is possible to make an application after this, but the sooner the application is made, the greater your chance of success.
Your solicitor would start by making a written request to the restaurant chain. If agreement to pay into court does not happen, they can apply to the court to force this. You will need to provide written evidence as to why you think there are good grounds for an order to be made in your particular case.
What grounds do you need in order to be successful?
The award of security for costs is available in specific situations, and is always subject to the court’s discretion. There are various situations which might justify the need for a security for costs order. For example:
- If the restaurant chain is based out of the country, making it harder for you to enforce a costs order against them if they lose.
- If there is reason to think that they do not have the means to pay a costs order. This will almost certainly be the case if there is a winding up petition outstanding against them, or if you can show that they are likely to be insolvent. If a business has deliberately misled the court about their full address, this might be considered an attempt to avoid being contacted for enforcement in due course.
- If there is a good reason to believe that the restaurant chain directors have taken steps to ensure their assets are not available if enforcement becomes necessary against them. For example, if they transfer assets into another business, or out of the country.
What happens if your opponent does not provide the costs security ordered?
Any order will usually include sanctions for failure to comply with it. The court may order that the proceedings are ‘stayed’ until payment is made, although this is not usual. An ‘unless order’ may be attached to a security for costs order, so that unless the company complies with the terms of the order, its claim may be struck out.
How we can help
Security for costs can be a valuable tool for you if you find yourself at the end of a court claim. It is particularly valuable if you believe that the claim is unreasonable and bound to fail, but it is unlikely that your costs will be paid by the other side due to their financial circumstances. It can also be a good tool to focus everyone on the risks being taken, and may help to lead to a settlement or even a withdrawal.
For further information and assistance, please contact Crane and Walton Solicitors LLP in Coalville on 01530 834466. Crane and Walton LLP also has offices in Ashby, Leicester and Melbourne.
This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.
