Refusing to prove ability to pay costs is not a justified litigation tactic, says CA

Court of Appeal: time to challenge a budget is at the CCMC

Court of Appeal: time to challenge a budget is at the CMC

A High Court ruling denying an order for security for costs even though the party involved refused to show that it could pay costs was “illogical and unacceptable”, the Court of Appeal has decided.

The lower court had found this to be a litigation tactic, but Lord Justice Sales said it was reasonable to believe that a party could not pay the other side’s costs if it deliberately refused to show that it could.

The court was ruling in Sarpd Oil International Ltd v Addax Energy SA & Anor [2016] EWCA Civ 120, in which Addax appealed against Mr Justice Andrew Smith’s decision last August not to make an order for security of costs in a £1m claim that a delivery of gas oil did not meet the contractual specifications.

Smith J said: “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… 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.”

Giving the appeal court’s judgment, Sales LJ said: “We consider, with all due respect to the judge, that he 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.

“The judge said that the obvious explanation of the refusal was that Sarpd wanted, for the purposes of settlement negotiations, to leave Addax in doubt about whether it would recover its costs, even if it defeated the claim. But the thinking behind that is that it is permissible for Sarpd to give Addax reason to believe it will be unable to recover it costs but at the same time assert that there is no reason for the court so to believe. That is illogical and unacceptable.

“[Sarpd’s counsel’s] alternative explanation in oral argument was that Sarpd might just want to keep its financial position confidential for business reasons. But as Sales LJ pointed out, arrangements can always be made by the court if a litigant has legitimate business reasons for keeping something confidential. No application was made for the court to sit in private or to avoid referring in public to relevant financial amounts.”

Addax had told Smith J that the practice in the Commercial Court was to order security for costs in circumstances such as these: where a claim was brought by a company that has not filed accounts that were publicly available, which has no discernible assets and which declined to reveal its financial position.

The judge responded: “I suspect that [counsel] might be right about that, but if such a practice has developed, I cannot think it justified and I decline to follow it.”

But Sales LJ said the judge had been wrong. Such a practice, if it had developed in the Commercial Court, was “sound”. Lord Justice Lewison had granted permission to appeal on the basis that this was an important point of practice which should either be upheld or rejected at appellate level. “We would uphold it,” said Sales LJ.

In addition, Smith J indicated that, had he ordered security, he would have done so with reference to Addax’s approved costs budget. Sarpd argued that in such a situation the judge should go behind the budget to examine for himself whether certain sums were reasonable and proportionate.

But on this point the Court of Appeal agreed with the judge, on the basis that Sarpd had had its chance to challenge the budget at the case management conference.

Sales LJ said: “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.”

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