Security for costs: trench warfare in the Commercial Court and Chancery Division

Security for costs (“SFC”) requests and applications are part of the staple diet of interlocutory matters for practitioners in the Business and Property Courts in England and Wales (“B&PCs”). This article focusses on practice in the Commercial Court and Chancery Division in disputes involving foreign claimants. The premise of this article is that, in such cases, there is typically no genuine objection to the provision of SFC. A claimant is then expected to stick to their guns and engage in sensible discussions about the provision of security if it is sought by one or more defendants. The battleground in that scenario typically shifts to quantum and staging of security. That is the focus of this article.

Many of the observations made below also apply to cases in which the claimant first contests liability to provide SFC, and loses, but the tactical approach would normally differ between such “liability and quantum” cases and pure “quantum” cases. For example, the adverse costs exposure of a claimant burying their head in the sand is far greater in pure “quantum” cases.

This article considers practice relating to four key aspects at the quantum stage:

1. Lateness/timing of applications
2. Incurred costs
3. Discounting
4. Staging of security

(1) Lateness/timing of applications

A common question when dealing with SFC requests or applications is when to seek security. For defendants, it is often difficult (if not impossible) to predict with any accuracy the costs of the proceedings until (i) the close of pleadings and (ii) work prior to the first Costs and Case Management Conference (“CCMC”) directed at agreeing directions to trial, the scope of disclosure under the Disclosure Review Document and formal preparation of costs budgets (Precedents H).

Is it a good objection by a claimant, then, to argue that a SFC request or application is late if only made at that stage, i.e. in the run up to the first CCMC? 

There is relatively recent Commercial Court authority confirming that it was “perfectly reasonable” for the defendant to undertake most of their defence preparation work before seeking security: see Bluewaters Communications Holdings LLC v Bayerische Landesbank Anstalt Des Offentlichen Rechts [2018] EWHC 78 (Comm). In that case, Popplewell J rejected submissions regarding delay, noting the court could not have resolved any quantum-related dispute before the formulation of the detailed pleaded cases.

That approach is also reflected in Appendix 10 to the latest edition of the Commercial Court Guide (11^th ed., 2022) (“the Guide”). This makes the following key points:

1. First applications for SFC should not be made later than at the (first) CCMC and in any event any application should not be left until close to the trial date.
2. “Delay to the prejudice of the other party or the administration of justice might well cause the application to fail, as will any use of the application to harass the other party.”
3. A separate hearing date for the SFC application should be obtained if there is any concern that there will not be enough time at the CCMC to deal with the application.

Implicit in that clear guidance in the Guide is a recognition that the first CCMC is the natural forum for consideration of a first SFC application. Where such an application has to be listed separately from the first CCMC, one would expect it to follow in quick succession. In the Commercial Court, a 1 hour presumptive hearing length applies to SFC applications: F5.5(a). In the Chancery Division, longer hearings are not uncommon.

Typically, cases where security is refused on account of lateness are ones where the application is made in the lead up to trial: see e.g. Gresport Finance Limited v Battaglia [2015] EWHC 2709 (Ch). Even then, the Court may allow a late application where the claimant cannot establish any clear detriment to the claimant (or fault by the defendant): see e.g. Danilina v Chernukhin [2018] EWHC 2503 (Comm). See also Appendix 10, para 2 to the Guide.

(2) Incurred costs

This is related to the issue of lateness or timing. The short point is that lateness is likely to have some effect on the quantum of security, because security is often only ordered for future not incurred costs. An illustrative case is Accident Exchange Ltd v McLean [2018] EWHC 1533 (Comm); [2018] 4 Costs LR 713. In that case, Teare J considered a protracted and heavy litigation arising out of expert services in the credit hire industry. The case was listed for a 14-week trial starting in October 2018. The defendants estimated their combined costs to the end of trial to be about £19m and sought security of about £15m (80%). They sought payment in three tranches to cover their incurred costs, their costs to the end of July 2018 and their costs to the end of the trial. Teare J disagreed with the defendants on the amount of security (granting 60% generally) and made a further reduction (60% of 60%) in respect of the incurred costs.

The guiding principle as to incurred costs was said to be that stated by Richard Millett QC, sitting as a deputy judge of the Chancery Division, in Re Bennet Invest Ltd [2015] EWHC 1582 at [28]: “Delay in making the application is one of the circumstances to which the court will have regard when exercising its discretion to order security. The court may refuse to order security where delay has deprived the claimant of the time to collect the security, or led the claimant to act to his detriment or may cause hardship in the future costs of the action. The court may deprive a tardy applicant of security for some or all of his past costs or restrict the security to future costs…”

Taking a step back, it is unlikely that a reduction or exclusion on the recovery of incurred costs would be appropriate on a SFC application that was brought in line with the usual practice for first applications (or subsequent applications). Such a reduction is properly limited to cases of culpable delay. However, in practice, opponents will frequently deploy this objection more widely. The above cases provide helpful ammunition in such a scenario.

(3) Discounting

Perhaps the most significant, in terms of quantum, principle emerging from the case law is that a discount to the amounts estimated in a costs budget or schedule is appropriate. The case law closely reflects the realistic levels of recovery on an inter partes basis.

As a starting point, the usual practice of the BP&Cs, at least in the Commercial Court, is to proceed on the basis that there would be a 60-70% costs recovery on a standard basis costs assessment. As Teare J explained in Danilina v Chernukhin [2018] EWHC 2503 (Comm) at [17], given 60-70% is the usual range for a standard (as opposed to indemnity) basis costs assessment, it is (usually) appropriate to apply the same discount for SFC purposes. Teare J followed the same approach in Accident Exchange Ltd v McLean at [42], relying on Stokors SA and Others v IG Markets Ltd [2012] EWCA Civ 1706 as authority for a 60% default.

There are at least two interesting exceptions to that general principle.

First, there are cases in which costs budgets or the amount sought for SFC are particularly low or at least moderate. While the converse is the norm, defendants who have obtained especially cost-effective representation should not be penalised by the broad-brush 60-70% range. This exception has been recognised, for example, by Cockerill J in Maroil Trading Inc v Cally Shipholdings Inc [2020] EWHC 3041 (Comm). She granted 75% of costs sought and noted that “the hourly rates are entirely sensible and reasonable. In fact, they are positively moderate” and also acknowledged “the requirement to err slightly on the side of the recipient” (see at [13]).

Secondly, the courts are, at times, willing to grant a higher level of security if “there is a real possibility, whether probable or not, that an order for indemnity costs might be made against the claimant”: Tugushev v Orlov [2018] EWHC 3471 (Comm) at [23(9)]. That may be the case in cases involving allegations of fraud, conspiracy, duress or other serious wrongdoing, especially if there is a limited documentary foundation for the claim. But the category of cases is not closed.

(4) Staging of security

Staging is a vexed subject. It is common for parties to make different assertions as to the standard practice and there is a dearth of reported cases on this issue. Nonetheless, by way of general guidance, it is often argued on a first application for SFC that the initial stage of security should be limited either to the end of the disclosure stage or the exchange of witness statements. Followed by security in further tranches for later stages, such as expert reports, trial preparation and trial. Security for ADR/settlement is usually (and understandably) sought as part of the initial tranche of security or spread across several tranches.

On first principles, there is force in both the argument that the disclosure stage is the natural cut-off for the initial tranche of security and the rival argument for the witness statement stage. Arguments for the disclosure cut-off tend to draw on the importance of disclosure to settlement discussions, which often follow that stage. Arguments for the witness statement cut-off can properly rely on the parallel nature of the disclosure and witness statement stages.

Lastly, if an early application for SFC is made, say before the close of pleadings, a claimant is likely to be on strong footing to seek an adjournment to the first CCMC of the bulk of that application (save security for the statements of case stage). This can be justified on principled grounds, namely that the Court lacks the certainty to assess SFC at such an early stage. Sarpd Oil International Ltd v Addax Energy SA [2016] EWCA Civ 120 chimes with that argument. The Court of Appeal (at [52]) held that “the costs budgets as so “approved” should be used as the relevant reference points for considering the amount which should be ordered for security for costs.”

Concluding remarks

A keen understanding of the mechanics of the case law on quantum and staging of SFC and prevailing practice is likely to reap rewards. A win on SFC, whether for a claimant or defendant, can have a dramatic effect on the momentum of a case. In particular, in cases where cost sensitivities are more pronounced or the amount in dispute and costs may be out of kilter. Such an early victory can pave the way for a quick, favourable settlement.

Conversely, a misguided approach to negotiations or submissions on SFC will heighten the risk of adverse costs exposure and can also have a negative knock-on effect on other case management questions before the Court (if determined together with SFC). Particularly where the dispute on SFC is limited to quantum and staging, the trend in the B&PCs and particularly the Commercial Court is to expect litigants and their legal representatives to be pragmatic and limit unnecessary satellite litigation.

Philippe Kuhn

27 April 2022