A successful party in litigation is usually entitled to have a substantial part of its costs paid by the losing party. Recovery of those costs can be of great importance, particularly in expensive IT litigation. However, getting an order that the losing party pays costs is one thing: collecting the money is another.
As defendants do not choose to embark on litigation, the Civil Procedure Rules are concerned particularly to protect them against being unable to enforce a costs award if they successfully defend the claim. This is done by requiring the claimant to provide some security against which the defendant can later enforce a costs award, as a condition of continuing with the claim.
Obtaining such security for costs is as relevant in IT disputes as it is in any area of litigation. Costs are unusually high (parties involved in a two-day TCC trial can each typically expect to incur costs well into six figures). Many software houses, especially in the niche markets, are small scale or start up, so one of the litigating parties may be relatively insubstantial. Against those figures they are unlikely to be able to pay the other side’s costs if required to do so.
The purpose of this article is to address three basic aspects of security for costs applications: (i) stifling, (ii) timing and (iii) counterclaims.
Stifling
The circumstances in which an application can be made for security for costs are dealt with in CPR 25.13. Although there are other circumstances which are always worth bearing in mind, the provision most commonly relied upon in the context of IT litigation is that the claimant is a company and ‘there is reason to believe that it will be unable to pay the defendant’s costs if ordered to do so.’[1]
However, one factor which will count against ordering security is if the order is likely to prevent a claimant from pursuing a just claim (ie to ‘stifle’ it). A claimant who is unable to put up the security ordered will have its claim stayed or struck out. There is an obvious tension: a claimant’s poverty means there is reason to believe it will be unable to pay the defendant’s costs and activates the court’s jurisdiction to grant security; it also makes it more likely that ordering security will stifle the claim, because the claimant will not be able to provide such security.
This is a tension the courts are commonly called upon to resolve. The problem is dealt with in this way:[2]
· it is for the party claiming that the order would stifle the claim to show that it would do so;
· this involves more than the claimant showing that it does not have the resources to provide security – it will also have to show that there is no prospect of funds being made available from any outside source such as a creditor, shareholder, director or some other party whose interests are affected;
· the power to grant security should not be used as an instrument of oppression – in a clear case, where the defendant’s failure to meet the very claims in the action give rise to the claimant’s lack of funds, that will count against making an order for security.
Sometimes, however, a claimant company will neither have the resources nor outside sources from which it can provide any meaningful security. If the defendant is unable to show that the claim is without merit, security for costs is unlikely to be ordered. If it is not settled the claim will have to be resolved at trial. A defendant in that unhappy situation will either lose at trial or win a pyrrhic victory: in either case it is unlikely to recover its own costs from the claimant.
Timing
A defendant considering an application for security should not delay. The commentary at CPR Note 25.12.6 encourages defendants to apply ‘promptly as soon as the facts justifying the order are known.’
There are a number of risks in not doing so. It takes time to tee-up an application. An applicant is usually expected to have made a written demand to the claimant’s solicitor before issuing an application.[3] This may include a request for copies of the claimant’s accounts, or other information as to its financial resources. It may be desirable to have such information analysed and reported upon by a forensic accountant before any application is made.
By the time the application is made, if it is well into the action it will be easier for the claimant to paint the move as one made to stifle the claim, or disrupt preparation for trial. The claimant may say that there is simply not the time available to raise funds to put up security at short notice.
A late application was made in Vedatech Corp v Crystal Decisions (UK) Ltd [2002] EWCA Civ 356. The defendant applied for security less than two months before a trial listed for 20 days. The application was heard three weeks before the trial. The lateness of the application meant that the ordinary order (staying the claim unless security was provided) was not appropriate as the trial date would have been missed. The only option was therefore to provide for a sanction of striking out, rather than a stay. The order made was for the claimant to provide £200,000 by way of security in 10 days or the claim would be struck out.
The Court of Appeal set the order aside holding that ‘to require £200,000 to be found in 10 days otherwise the action is to be struck out goes beyond the proportionality which underpins any exercise of discretion’.[4]
There is a way round this. Money is not the only form security can take. Other options include legal charges, bank guarantees or a personal guarantee. In Inventors Friend v Leathes Prior (2011) 17 January 2011 unreported, the court ordered security less than two weeks before the start of the trial by requiring it to be provided by a personal guarantee from the claimant’s director. Difficulties in raising money in a short period were therefore avoided.
Counterclaims
It is only a ‘defendant’ who can apply for security for costs.[5] However, ‘defendant’ means ‘a person against whom a claim is made’.[6] A claimant facing a counterclaim can therefore apply for security in respect of the costs of that counterclaim.
This will sometimes be worth considering in IT disputes; but a difficulty may present itself. In a typical IT dispute, on the one side is a claim for payment for software or services, on the other is a counterclaim for damages arising out of the same, allegedly defective, software or services. The claim and counterclaim involve overlapping facts: typically whether software conforming to the contract was delivered.
In these cases it will be difficult for either ‘defendant’ to obtain security for its costs of defending the claim brought against him. The reason for this is explained in B J Crabtree (Insulation) Ltd v GPT Communication Systems Ltd 59 BLR 43. This was a construction dispute involving a similar overlapping claim and counterclaim situation: money claimed to be due for construction work in the claim, and a counterclaim for damages for (the same) defective work.
Were security awarded in respect of (say) the counterclaim, if it were not paid the counterclaim would be stayed. But the defendant would still be able to raise the same issues in defending the claimant’s claim as would have been raised in advancing the counterclaim: (ie the sum is not due because the work did not comply with the contract). If the court found that the defendant was right, the likely action would be to lift the stay and give judgment on the counterclaim. Ordering security would have achieved nothing but to require the defendant to conduct the litigation ‘with one hand tied behind their back’[7].
A defendant may have to make a choice in that situation as to what is more important: to obtain security on the claim brought against it, or to pursue a counterclaim with overlapping facts. The choice may not be an easy one.
Conclusion
IT litigation is expensive. Concerns about costs are likely to be high in a client’s mind. If a claim is brought by an impecunious claimant, those concerns will be all the greater. CPR 25.12 contains powerful tools to address some of that concern. They are often most effective, and successful, if an application can be made at the earliest possible stage. Issues touched on above can be seen as pitfalls to avoid in the making of such an application, or stumbling blocks to pile up before an opponent, depending on whether one makes or resists the request for security.
Michael Taylor is a barrister at 4 Pump Court. He is recommended as a leading IT junior and sits on the SCL London Group Committee.
George Woods is a barrister and a member of the IT Group at 4 Pump Court.
[1] r 25.13(2)(c)
[2] Kufaan Publishing Ltd v Al-Warrack Bookshop Ltd, March 1 2000, unrep. CA; Keary Developments Ltd v Tarmac Construction Ltd and another [1995] 3 All ER 534 at 540 j.
[3] Atkin’s Court Forms, 2nd edn, 13 §8 is prescriptive in this respect: (‘a written request should be sent…’) as are some judges.
[4] Para 20, per Ward L.J.
[5] CPR 25.12(1)
[6] CPR 2.3(1)
[7] Page 52 per Bingham LJ
