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Security for costs and the role of court approved costs budgets

Sales LJ sets out the Court of Appeal’s policy regarding costs security when a party demonstrates a 'deliberate reticence' about its financial position, and the relevance of any court approved costs budget in the calculation of an appropriate sum

SARPD Oil International Ltd v Addax Energy SA & Anor [2016] EWCA Civ 120 (03 March 2016)

http://www.bailii.org/ew/cases/EWCA/Civ/2016/120.html 

This case involved costs issues arising out of an ongoing dispute between the claimant – SARPD – a British Virgin Islands (BVI)-incorporated company, and the defendant – Addax – a company incorporated in Switzerland. The substantive dispute, yet to be resolved, involved the supply of gas oil by Addax to SARPD, which SARPD claims did not meet the contractual terms specified. Addax contest that, in the event that the gas oil did not meet the required specifications, it was the fault of Glencore Energy UK Ltd, from whom Addax bought the gas oil on back-to-back terms. Consequently, Addax also bought Part 20 proceedings against Glencore for damage or an indemnity in relation to SARPD’s claim (para 3).

This case involved costs issues arising out of an ongoing dispute between the claimant – SARPD – a British Virgin Islands (BVI)-incorporated company, and the defendant – Addax – a company incorporated in Switzerland. The substantive dispute, yet to be resolved, involved the supply of gas oil by Addax to SARPD, which SARPD claims did not meet the contractual terms specified. Addax contest that, in the event that the gas oil did not meet the required specifications, it was the fault of Glencore Energy UK Ltd, from whom Addax bought the gas oil on back-to-back terms. Consequently, Addax also bought Part 20 proceedings against Glencore for damage or an indemnity in relation to SARPD’s claim (para 3).

This Court of Appeal decision arose out of an earlier application for a court order by the defendant, Addax, that the claimant, SARPD, should give security for its costs. The amount Addax wished SARPD to pay into court was £896,161.27. Addax’s application was made under CPR 25.13 (2) (c), which allows the court to make such an order if there is reason to believe that the claimant, incorporated outside the UK, will be unable to pay the defendant’s costs if ordered to do so (para 4).

The amount of security claimed by Addax covered three distinct elements: 1) the costs incurred by Addax in defending the claim; 2) the costs incurred by Addax in "passing the claim on to [Glencore], which is a natural and inevitable result of [SARPD] bringing the claim"; and 3) the costs incurred by Glencore in defending the part 20 claim. It was said that, if Glencore obtained an order that its costs be paid by Addax, Addax should "be entitled to add the liability for [Glencore's] costs to its costs which are recoverable from [SARPD]", and that the order for security should cover them (para 4).

In the earlier original High Court hearing, Mr Justice Andrew Smith had decided that SARPD’s “reticence” about its financial position did not give reason to suppose that the company could not pay the costs if it lost. In making this decision, Andrew Smith J said he suspected that it had become the practice of the commercial courts to order security for costs “in circumstances where a company had not filed publicly available accounts, had no discernible assets and declined to reveal its financial position.” However, Andrew Smith J then commented that, if such practice had developed, it was not justified and he would not follow it (para 7). The first issue before the Court of Appeal was therefore whether the judge’s decision to decline Addax application for security of costs was justified (para 8).

The second issue the Court of Appeal considered was that, if security of costs were to be ordered against SARPD, what expenses that security should encompass. Specifically, if SARPD’s claim failed, should the security cover Addax’s costs of suing Glencore, and also the costs which Addax would have to pay Glencore in respect of Glencore’s own costs of defeating the Part 20 proceedings (para 9)? In the earlier High Court decision, Andrew Smith J had not needed to answer these questions, because he denied Addax’s bid to make SARPD give security for its costs. Nevertheless, Andrew Smith J had also commented that, if he had ordered security, he would have included Addax’s costs of suing Glencore but excluded the costs for which Addax would be liable to Glencore (para 10).

The final issue which the Court of Appeal was asked to decide in this case was the amount of security to be ordered, if such a grant was to be made. Would the original, approved, costs budget form the basis of such a figure (para 9) – or would costs incurred be relevant, along with an assessment of whether those costs incurred were reasonable and proportionate (paras 31 – 33)? In his judgment, Andrew Smith J had indicated his preference for adhering “to the amounts set out in the costs budget for Addax” (para 10).

Lord Justice Sales delivered the lead Court of Appeal judgment in this case.

In relation to Andrew Smith J’s decision not to order SARPD to give security for its costs, Sales LJ said this decision was “plainly wrong”.  “If a company is given every opportunity to show that it can pay a defendant's costs and deliberately refuses to do so there is, in our view, every reason to believe that, if and when it is required to pay a defendant's costs, it will be unable to do so” (para 17). Rejecting the respondent’s explanation that SARPD “might just want to keep its financial position confidential for business reasons”, Sales LJ further noted that “no application was made for the court to sit in private or to avoid referring in public to relevant financial amounts” (para 18) – both of which options were available. Sales LJ further noted that, while “deliberate reticence” does not amount to a breach of CPR 1.3, “a court can and should take account of deliberate reticence as part of an overall picture” (para 19).  On behalf of the Court of Appeal, Sales LJ offered no view as to whether it was often the practice of the Commercial Court to grant security of costs against “a foreign company who is not obliged to publish accounts, has no discernible assets and declines to reveal anything about its financial position.” However, Sales LJ also stated that “our view is that the practice is a sound one”, and one the Court of Appeal “would uphold” (para 19).

The Court of Appeal then turned to the second question before it, which related to whether the costs incurred in the Part 20 proceedings were Addax’s, for the purposes of determining the overall security required (paras 23 – 30). Earlier, Andrew Smith J had stated that, if he had ordered security, he would have included Addax’s costs of suing Glencore but excluded the costs for which Addax would be liable to Glencore (para 10).Ultimately, the Court reversed Andrew Smith J’s decision regarding the costs for which Addax will be liable to Glencore but uphold the judge’s decision regarding Addax's own costs of suing Glencore (para 30).

Finally, in relation to the third question, regarding the relevance of costs budgets to the amount of security required (para 31 – 53), the Court of Appeal ultimately concluded that Andrew Smith J had been correct in taking Addax’s and Glencore’s approved costs budgets as “the appropriate reference point” for conducting such an evaluation (para 49). Two reasons for this decision were offered by Sales LJ. Firstly, he noted that SARPD had not previously challenged the reasonableness or proportionality of either Addax or Glencore’s cost budgets at the first costs management conference (CMC), which was “the appropriate occasion” in which do to so (para 50). Further, there had been “no relevant change of circumstances between the CMC and the present application (para 51)...

"...it would be contrary to the overriding objective to allow Sarpd to try to re-open costs issues which it had already had a fair opportunity to address. It would not be just to permit it to do that and it would add disproportionate cost in dealing with the case if a court had to go behind the settled costs budgets in a case like this. To allow such a course would add unnecessarily to expense, rather than save it (see CPR Part 1.1(2)(b)); would be likely to add to the time and effort required to argue and determine a security for costs application and so would contravene the requirement to ensure that cases are dealt with expeditiously and fairly (see Part 1.1(2)(d)); and would also involve allocating an inappropriate share of the court's resources in having to re-visit an issue already dealt with by the court (see Part 1.1(2)(e))."

Secondly, because Addax and Glencore’s costs budgets had been approved, this provided a “strong guide as to the likely costs order to be made after trial, if Addax is successful, both in relation to the incurred costs elements and in relation to the estimated costs elements” (para 52).

As a result of the Court of Appeal’s decision in this case, SARPD was required to pay £868,254.42 in security (para 52) – just under £28,000 less than Addax had initially requested (para 4).

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