Security of Costs - a Powerful Instrument in Litigation

Once a claimant decides to initiate proceedings, they inevitably incur legal costs, which they choose to undertake. Unless the defendant promptly admits culpability, they are compelled to defend the matter, thus inevitably incurring legal costs.

A defendant may be successful in defending the claim and seek to recover their legal costs; however if the claimant is unlikely to be sufficiently solvent to meet a potentially adverse result, particularly in a cross-border matters, and where the claimant is out the jurisdiction, an application for security for costs could be a powerful tool for the defendant.

What is a security for costs?

Security for costs is a legal mechanism that allows a defendant to request assurance that if they succeed in their defence against a claimant, they will be able to recover their legal costs from the claimant. This assurance typically comes in the form of a monetary deposit or guarantee paid by the claimant to the court. It acts as a safeguard for defendants, particularly in cases where the claimant's financial situation may raise concerns about their ability to pay the defendant's costs if the claim fails. If the claimant fails to provide security for costs as ordered by the court, their claim may be dismissed or stayed until the security is provided.

The most common situation where a security of costs order is when an order is made which requires the claimant to either pay money into the court or provide a bond or insurance policy as security against their opponent’s legal costs for the proceedings or some part of the proceedings in the event of their losing the case.

Gonzalo Butori, a Partner, explained “Securing sums in advance requires valid grounds, typically stemming from the claimant's potential inability to cover potential adverse costs if the case does not rule in their favour.” Gonzalo further commented “If the court grants security for costs in favour of the applicant, the opposing party must allocate a specific amount, often an estimate of the applicant's arbitration expenses, either through an escrow account or more commonly via a bank guarantee. This amount remains reserved until the tribunal issues its final award regarding arbitration costs.”

Grounds for an Application

There are six grounds under which an application for a security for costs. If one of the six grounds are satisfied, an application may be able to be made providing the Court is satisfied that in all circumstances the order is just.

• The claimant is resident outside the jurisdiction of the court.
• The claimant can reasonably be expected not to be able to pay the defendant’s cost if so ordered to pay.
• The claimant has changed address following the claim with the intention of evading the potential consequences of litigation.
• The address the claimant has provided is incorrect or has failed to give an address.
• The claimant is a nominal claimant and it is suspected that they will not be able to pay the cost if required.
• The claimant’s assets have been dealt with in a way that will make enforcement of a costs order problematic.

What does the Court consider before granting a Security for Costs?

Obviously the prospects of success are pertinent but the Court will not consider the merits of the case in any detail before the proceedings. Here are some of the factors that a Court will consider before granting a security of costs order.

• Risk of non-recovery if the defendant can demonstrate that there is a significant risk they will not be able to recover their costs from the complainant if they win the case, the court may order security for costs
• The court may consider the financial status of the claimant If the complainant lacking funds, insolvent, or has a history of not paying legal costs. 
• If there is the suggestion that the complainant for an improper motive to harass the defendant
• If there is a question of jurisdiction

Ultimately the decision to grant a security of costs order is at the discretion of the Court. Giambrone & Partners commercial lawyers point out that the specific grounds and procedures for obtaining security for costs can vary between jurisdictions, so it's essential to instruct multi-jurisdictional commercial lawyers with a comprehensive understanding of the jurisdiction in question.

The forms that the Security can take

The security can take many forms here are the most common:

• Direct payment of money into the Court
• Bank bonds
• Bank guarantees
• Parent company guarantees
• Insurance policy (ATE)

Giambrone & Partners’ commercial litigation lawyers have a wealth of experience in successfully applying for security of costs orders to ensure that our clients do not face escalating legal fees.

Gonzalo Butori has acted in a wide range of international and domestic commercial disputes. He has experience dealing with complex, high-value cross-border litigation.

He has particular proficiency with regard to dispute resolution and represents claimants and defendants in all jurisdictions on civil and commercial matters and regularly appears at mediation and arbitration hearings. He has acted as co-advocate in international commercial disputes under ICC and LCIA rules as well as in other Alternative Dispute Resolution (ADR) proceedings.

Gonzalo is recognised for his pragmatic approach and solution-based strategies as well as his robust capacity when pursuing his clients’ best interests. When heavy disclosure in foreign languages is required, he develops and delivers technical solutions to ease the cost burden for clients.

He has assisted in a number of cross-border transactions involving various EU jurisdictions and achieved successful results. He also specialises in the conflict of laws and jurisdiction.

Gonzalo regularly advises international clients in connection with family and inheritance-related cross-border matters. Throughout his experience, he has dealt with high-value and complex matters both contested and non-contested which have given him valuable exposure and experience.

If you would like more information on security of costs please contact Gonzalo's clerk Sam Groom on SG@giambronelaw.com or please click here.