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‘My Word is My Bond’ : Security For Costs?

‘My Word is My Bond’ : Security For Costs?

Security for costs for a commercial dispute

Security for costs can be a thorny issue for companies involved in litigation. It is open to a defendant, or a claimant is respect of a counterclaim, to make an application to Court seeking an order for security for the payment of costs in certain circumstances. Such an application can have both practical and tactical benefits for the applicant. If granted and complied with it, it should go a considerable way to providing comfort to the applicant that money will be available to reimburse it for a proportion of its legal costs if successful at trial.

What can the respondent to an application for security for costs do?

But what can the respondent to an application for security for costs do? The decision to commence litigation is generally not taken lightly. How does a small business owner then deal with the situation where the company is faced with a request to provide security for the costs of the other party in advance of the case being determined on its merits?

Dunn Motor Traction Limited decided to sue National Express for damages arising, Dunn says, from the wrongful termination of a coach services contract. Dunn claimed damages estimated at £20M in lost profits.

National estimated its legal costs of defending the claim to trial to be £1.8M and sought security for those costs on the basis that it had reason to believe that Dunn will be unable to pay National’s costs if ordered to do so and it would be “just” for the Court to make an order for security.

Dunn is currently in a difficult financial position, it says, as a result of National’s actions. Dunn forecasts that things will improve as a result of its increased efforts to win new business. Dunn pledges the support of other group companies and its major (sole) shareholder, Scott Dunn who has irrevocably agreed to indemnify Dunn in respect of any costs liability to National.

Still unable to pay?

In these circumstances, can the Court be satisfied that Dunn will be unable to pay National’s costs and would it be just to make an order for security?

Apparently, yes. The offer of an indemnity by the main shareholder, albeit seemingly generous, did not carry any great weight with the Court. It was to be regarded as an asset of the company and a factor to be considered, but in the absence of exceptional circumstances, it would not be sufficient to tip the scales in favour of an ability to pay. Security of £975,000 was ordered.

Security for costs is a very real issue for small businesses contemplating litigation. It should feature in the risk assessment undertaken with your legal advisers at the outset of the case. One option is to seek After the Event (ATE) Insurance to underwrite the risk of an adverse costs award. An ATE Policy, taken out with a substantial and reputable insurer, on industry standard terms should usually avoid the need for hard cash to be made available. In circumstances where the claimant may already have been starved of income by the very subject-matter of the proceedings and has its own legal costs to fund it is important that the risks of a security for costs application and the potential responses are fully explored as early as possible.

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