A party’s refusal to demonstrate that it would have the means to pay costs is not in itself enough to make an order for security for costs because it could simply be a litigation tactic, the High Court has ruled.
Mr Justice Andrew Smith also decided that a costs budget approved by another judge should form the basis of the order, even though he suspected the sums allowed to be too high.
Sarpd Oil International Ltd v Addax Energy SA & Anor  EWHC 2426 (Comm)  concerned a £1m claim that a delivery of gas oil did not meet the contractual specifications, with the defendant bringing part 20 proceedings against Glencore Energy as the supplier of the oil to it.
The defendant’s application for security for costs was on the basis that there was reason to believe the claimant would be unable to pay, because Sarpd had said nothing about its financial position and Addax had access to little information about it.
Smith J said the evidence was not enough. “Mr Lewis [counsel for Addax] described Sarpd as a ‘secretive’ BVI company, but there is nothing inherently ‘secretive’ about incorporation in the BVI, and Sarpd has filed such returns with the BVI companies’ register as are required.
“Nor am I persuaded that condition c [of rule 25.13(2)] is met because Sarpd has declined to demonstrate that it would have means to pay a costs order. It might be tempting to ask why, if it has means, should Sarpd not avoid the expense of an application for security by demonstrating them, and therefore to suppose that its refusal itself provides reason to believe that it will not be able to pay an order for costs, but that ignores the adversarial realities of commercial litigation.
“The amount in issue in these proceedings is some $1.5m [£1m], and the costs budgets of the three parties were in total some £1.5m. As far as I can see, the litigation involves no issue of collateral commercial importance for any of the parties and no question of law that any of the parties has an interest in having resolved.
“The commercial sense of settlement is obvious, and must be obvious to all the parties. It can only strengthen Sarpd’s hand in any negotiations if it leaves Addax in doubt about whether it will recover its costs even if it defeats the claim and with concerns that even then it might end up bearing its own and Glencore’s costs.
“The uncertainty may be awkward for Addax, but there is no reason that Sarpd should volunteer information to alleviate its difficulty. More importantly, this obvious explanation for Sarpd’s reticence about its financial position means, in my judgment, that on the evidence it is no reason to believe that it will be unable to pay an order for costs.”
Addax submitted that the practice in the Commercial Court is to order security for costs in circumstances such as these: where a claim is brought by a company that has not filed accounts that are publicly available, which has no discernible assets and which declines to reveal its financial position.
“I suspect that Mr Lewis might be right about that, but if such a practice has developed, I cannot think it justified and I decline to follow it,” Smith J said.
He went on to consider the other issues in the application “out of respect” for the counsel’s submissions.
On the issue of whether the court can order security for defendant’s costs in pursuing a part 20 claim, the judge said that, had he made an order for security, he would have assessed its amount having regard to Addax’s costs of bringing and pursuing the part 20 proceedings but disregarding its potential liability for Glencore’s costs if the claims failed.
On quantum, Smith J said that “were this virgin territory, my impression would have been that the amounts in the budgets of all parties are higher than proportionate”, but he was constrained by the fact that the budgets had been agreed and Mr Justice Blair approved, rather than just recorded, them.
Smith J said: “Accordingly, [they are] not to be departed from unless there is good reason to do so. Any doubts that I have about whether the budgeted costs are reasonable or proportionate would not be a good reason to depart from what Blair J approved: that would destroy the scheme of the new costs regime…
“I accept Mr Lewis’s argument that therefore the appropriate amount of security should be assessed on the basis that Addax’s budgeted costs are likely to be recoverable on a standard assessment.
“This conclusion, I think, applies to both costs that had already been incurred when the costs had been incurred and future costs that were estimated in the budget… I recognise that this understanding of the costs management regime might in some circumstances result in it inflating rather than reducing recoverable costs, but I cannot otherwise interpret it.”