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Can Parties Afford to Litigate?

10/06/2009

In today’s climate, many businesses are struggling financially. It is therefore important for Claimants and Defendants to consider whether they can actually afford to litigate.

There are a number of tactical applications a party can make against an opponent, in relation to the costs of the proceedings.

Security for Costs

An application for security for costs is made by making an application to the court. The purpose of making an application for security for costs is to seek protection from the risk of being unable to enforce any costs order you may later obtain.

The application must be supported by written evidence (preferably in the form of a witness statement) giving details of the grounds on which the application is made, the amount of security sought, details of the costs already incurred and an estimate of costs going forward. The order will provide you with a fund (normally held by the court) against which you can enforce any award of costs you may later obtain.

If you are one of the following, you may be able to make an application for costs:-

• A defendant to any claim;
• A claimant where a defendant who has brought a counterclaim;
• A third party in third party proceedings;
• A respondent to an appeal; and
• An appellant in respect of a cross-appeal.

An application for costs may only be made if the court is satisfied that, having regard to all of the circumstances in the case, that it is just to make such an order and one or more of the following is true about the person the application is being made against:

• He is resident out of the jurisdiction;
• It is a company or other body, whether incorporated inside or outside of Great Britain, and there is reason to believe that it will be unable to pay the defendant’s costs if ordered to do so;
• He has changed address since the claim was commenced with a view to evading the consequences of the litigation;
• He failed to give his address in the claim form or gave an incorrect address in that form;
• He is acting as a nominal claimant and there is reason to believe that he will be unable to pay the defendant’s costs if ordered to do so; or
• He has taken steps in relation to his assets that would make it difficult to enforce an order for costs against him.

The amount of security awarded is in the discretion of the court. The amount of security may be limited to the extra burden or risk involved in seeking to enforce orders for costs subsequently obtained. Alternatively, the amount of security may relate to the total costs likely to be incurred in opposing the claim or appeal.

When acting for a Defendant to proceedings, it is a tactical consideration whether to make an early application to court, for security for costs. The rationale behind making such an application is to ensure that if a Claimant’s claim is unsuccessful, that it has the money to be able to pay the Defendant’s legal costs if ordered. It is clearly unsatisfactory for a company to commence proceedings in the knowledge that if it loses, it will simply wind up and the Defendant and will not receive payment of its costs.

Costs Capping

As of 6th April 2009, the civil procedure rules, which the civil courts apply, are being amended to include specific provision for the capping of legal costs in proceedings. A party to proceedings may apply to the court for an order that a party (or both) is only entitled to recover a certain maximum sum for costs in respect of future work, from the other side if successful. The court can do so where it determines there is a substantial risk that costs will be disproportionately incurred, with it not being possible to control the risk by other case management powers.

Parties to litigation need to look beyond the facts and legal issues in the dispute. They must also consider whether it is commercial to proceed and whether their opponent is good for the money.