Appeal judges reject “sliding scale” approach to quantum of security for costs

Security for costs: Sliding scale caused difficulties

The Court of Appeal has rejected the use of a “sliding scale” to reduce the amount of security for costs in cases where there is a risk that court orders will not be enforced.

Lord Justice Hamblen said once it had been established that there were “substantial obstacles” sufficient to create a “real risk of non-enforcement”, the starting point was that the defendant should have security “for the entirety of the costs”.

Hamblen LJ said there was “no room for discounting the security figure by grading the risk using a sliding scale approach”.

However, he said that although security for all of the costs was “the starting point”, it “by no means follows” that security for all or any of those costs would be ordered by the court.

The Court of Appeal heard in Chernukhin and others v Danilina [2018] EWCA Civ 1802 that the claimant, Lolita Danilina, was a Russian national, resident in Moscow, who “for a number of years” was in a relationship with Vladimir Chernukhin, who had lived in England since 2004.

The first part of her claim was that she was the owner of Navigator Equities Limited, a company registered in the British Virgin Islands, the second that “in or around 2007” Mr Chernukhin “orally agreed” that assets acquired during the course of their relationship would be split between them. Mr Chernukhin was alleged to have breached this agreement.

Mrs Danilina commenced proceedings in February 2017, by applying for an injunction against Mr Chernukhin and Navigator.

In advance of a case management conference in July 2017, both Mr Chernukhin and Vadim Kargin, a resident of Latvia and shareholder in Navigator, issued applications for security for costs.

Hamblen LJ said: “The applications involved evidence from Russian lawyers relating to the issues of whether that the defendants would face a real risk of being unable to enforce any order of the English court in Russia and of the costs of seeking enforcement.”

Mrs Justice Cockerill ruled, in January this year, that there was a real risk of “a complete failure of enforcement”, although it was not “at the high end of probability”.

Hamblen LJ said she applied what she described as a “sliding scale” to the costs claimed.

“She did this by extrapolating from the figures claimed (which were up to the CMC) to an (unstated) total costs figure up to trial and then discounting (in an unspecified amount or percentage) from that total figure, to arrive at the appropriate sum for security.”

This approach reduced the £820,800 claimed by Mr Chernukhin and Navigator to £700,000, and the £104,800 claimed by Mr Kargin to £90,000.

Having considered the authorities on security for costs, in particular the leading Court of Appeal case of Bestfort, Hamblen LJ said the relevant risks were non-enforcement or additional burdens of enforcement, and a “real risk of either” would be enough to meet the ‘threshold test’.

“Some of the authorities refer to difficulties of enforcement. Mere difficulty of enforcement in itself is not enough (save in so far as it results in additional costs and therefore an extra burden of enforcement).”

Hamblen LJ said he recognised “the importance of the discretionary nature of the power to award security for costs” but considered that there was force in the criticisms of Cockerill J’s approach.

“In principle, security should be tailored so as to provide protection against the relevant risk. On the judge’s findings the relevant risk is that of non-enforcement of any costs order obtained.

“The purpose of ordering security in such circumstances is to secure the defendant against the risk of non-recovery of those costs.

“Since that is the risk against which the applicant is entitled to protection, I agree with the appellants that the starting point should be that the defendant is entitled to security for the entirety of his costs.”

Hamblen LJ went on: “The difficulties to which a sliding scale approach could lead are illustrated by this case. It would first be necessary to identify the appropriate total costs figure.

“In this case the judge had no evidence of the total costs and so had to extrapolate. It would then be necessary to grade the risk and arrive at an appropriate discount.

“That is a difficult and speculative exercise and it is to be noted that the judge did not identify the discount applied.”

Lord Justice Hamblen allowed the appeal. He said the security for costs so far provided could be treated as a payment on account of security for the costs of the action, with any further application for security dealt with “in accordance with the approach set out in this court’s judgment”.

Lord Justice Longmore and Sir Stephen Richards agreed.

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