Security for Costs and COVID-19: International Pipeline Products Limited v IK UK Limited & Others
Key Contact: Hugh Hitchcock
Author: William Rees
Security For Costs
An order for security for costs offers a party (usually a defendant) protection from the risk of their opponent engaging them in costly proceedings but not being able to pay the (usually defending) party’s costs of defending the litigation if ordered to do so. A successful applicant can obtain an order from the court that their opponent (normally the claimant), pays a sum into court which the defending party can later use to pay its costs if so ordered.
The conditions a party seeking security for costs must satisfy are set out in CPR 25.13:
(1) The court may make an order for security for costs if –
(a) it is satisfied, having regard to all the circumstances of the case, that it is just to make such an order; and
(c) the claimant is a company or other body (whether incorporated inside or outside Great Britain) and there is reason to believe that it will be unable to pay the defendant’s costs if ordered to do so;
There are numerous relevant factors to be considered in the court’s determination as to whether an applicant has made out that it is “just to make such an order”. Such factors include the following non exhaustive list by way of example:
- The ground on which the application is based.
- The respondent’s ability to comply with any order made.
- The likelihood of the claim succeeding. A genuine claim with good prospects should not be “stifled” by a security for costs application.
- Whether the claim is bona fide or a sham.
- Admissions by the defendant.
- Whether the claimant’s financial position was caused by the defendant’s actions.
- Open offers and payments into court
Recently, the Intellectual Property List of the High Court gave judgment on International Pipeline Products Limited (IPPL) v IK UK Limited (IKUK) & Others . The Claimant and the first Defendant both operate in the oil and gas industry, specifically providing products and services used in the maintenance and repair of oil and gas pipelines. The dispute arose from a failed corporate transaction wherein one of the defendants was due to purchase the Claimant company but the transaction did not complete. The Claimant alleged that, amongst other points, whilst in the Claimants employment, the defendants stole equipment and confidential information from the Claimant.
In his judgment, Deputy Judge Stone was asked to consider the impact of the COVID-19 pandemic and resulting economic downturn on the application, with the Defendants attempting to rely on the negative effects on the claimants business as part of their application for security for costs and argument that the Claimant would not be able to pay the Defendants costs if so ordered.
The Defendants produced and relied upon evidence of the difficulties the oil and gas industry are experiencing at the moment as a result of Covid 19. However, Deputy Judge Stone pointed out the general troubles of the oil sector were largely caused by an oversupply in oil due to distorted energy demand caused by lockdowns and that such evidence did not persuade him as the Claimant is specifically involved in repair and maintenance of pipelines.
Despite the fact that an executive of the Claimant company in evidence estimated that COVID-19 had caused a reduction in inquiries of around 10% but remained in a good trading position, Deputy Judge Stone rejected the Defendants application on the basis that he was “unable to conclude at this point in time that the impact of COVID-19, any economic downturn, or the current state of the oil and gas industry are such as to detract from the Claimant’s ability to pay the Defendants’ costs so as to be satisfied that there is reason to believe that the Claimant will be unable to pay”.
This is of course not to say that COVID- 19 and its effects on a party to a dispute could not be effectively relied upon by an applicant to succeed in a security for costs application. However, with COVID-19 likely having a lingering effect on the economic outlook for the foreseeable future, this body of law may well develop.
The courts will have a challenging task ahead in incorporating the economic impact of COVID-19 in security for costs applications. Public policy would dictate that it cannot be used to stifle genuine claims and the approach of the UK courts has broadly been to prevent parties from being placed under further financial pressure due to COVID-19. These factors could play into whether it is “just to make such an order” pursuant to CPR 25.13. These factors must however be balanced with Defendants being able to obtain protection from suffering financial ruin themselves should they successfully defend an action but are unable to recover their costs.
For more information on the topic covered, please contact our Litigation Team.