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COVID-19: security for costs in an economic downturn

The recent case of International Pipeline Products Ltd v IK UK Ltd and others is an early example of a party seeking to use the economic consequences of the COVID-19 pandemic to support a security for costs application. Given the predictions of a slow recovery and the prospect of litigating in financially uncertain times for some time to come, the case provides useful guidance on the extent to which these macro-economic issues are likely to be taken into account by the court when considering the costs of litigation and the ordering of security.

Background

The claimant and first defendant operated in the same industry, namely the provision of products and services for the maintenance and repair of pipelines for oil and gas.

Several of the defendants in the proceedings applied for security for costs during the COVID-19 lockdown, and asked the court to consider the effect of the projected economic downturn on the claimant’s current ability to pay. However, the claimant’s managing director said that while COVID-19 had caused a 10% dip in enquiries, there had been no cancellations, and he expected the claimant to continue to trade well.

Notwithstanding the claimant’s evidence, the defendant asked the court to take COVID-19, and the prospect of an economic downturn, into account. Specifically, the defendant pointed to numerous reports on the impact of the COVID-19 pandemic, and produced commentary on the claimant’s likely financial position, in support of its submission that the claimant’s business would suffer at the hands of the likely downturn, such that it would not be able to meet a costs award in the defendant’s favour.

The law

Under CPR 25.13, the court may make an order for security for costs if:

a) it is satisfied, having regard to all the circumstances of the case, that it is just to make such an order; and
b) (i) one or more of the conditions in paragraph (2) applies, or (ii) an enactment permits the court to require security for costs.

The conditions in paragraph (2) include, at sub-paragraph (c), that “the claimant is a company or other body (whether incorporated inside or outside Great Britain) and there is reason to believe that it will be unable to pay the defendant’s costs if ordered to do so”.

It was common ground between the parties that this was the relevant test for the deputy judge to apply.

The judgments in Chemistree Homecare Limited v Teva Pharmaceuticals Limited and Re Unisoft Group (No. 2) provide the following guidance on this threshold condition:

The question is whether the claimant will rather than might be unable to pay.
Inability to pay means that the claimant is unable to pay when the costs fall due for payment. This calls for an assessment of what the claimant may be expected to have available for payment at the due date(s), in the form of cash or other readily realisable assets.

In respect of a costs order made at the end of a trial where there is no possibility of summary assessment, the relevant due dates are: (a) the payment date of any order made by the trial judge for a payment on account; and (b) the date when an order for the balance is made upon completion of detailed assessment.

The question is to be judged and answered as matters stand when the application is heard by the court, although the court will take into account and give appropriate weight to evidence about what is expected to happen in the interval before the costs order would fall to be met (emphasis added).
This latter point was considered to be particularly relevant to the instant case, given that the hearing was conducted in the early days of the COVID-19 lockdown, with extensive evidence adduced on both sides as to the likely impact on the business of the claimant.

The court’s decision

The court first determined what the likely costs of the defendants would be if they were successful, and the point at which the claimant would be required to pay these. It considered various factors (including the parties’ cost estimates, the trial window, the likely timing of judgment and an interim costs order) to reach the central question: was there reason to believe that the claimant would be unable to pay £800,000 to £900,000 in October or November 2021? It followed that the pertinent consideration for the court was: “will things deteriorate substantially for the claimant between now and October or November 2021?”

While the deputy judge recognised that we simply do not know the direction of the economy as a result of the pandemic, he was unable to conclude at the time of the application that the impact of COVID-19, any economic downturn, or the current state of the oil and gas industry, were sufficient to satisfy himself that the claimant (in the pipe maintenance and repair industry) would be unable to pay £800,000 to £900,000 in October or November 2021. He was, conversely, satisfied with the claimant’s evidence that the current global oil oversupply had not significantly affected pipe maintenance and repair requirements: “pipes are needed for moving oil and gas for storage, even if exploration is slowing.”

Comment

Given the financially uncertain times ahead, this is unlikely to be the last security for costs application predicated on the pandemic.

For any parties who are thinking of making an application on a similar basis, the judgment contains a key lesson: where an applicant seeks to rely on the anticipated deterioration in the respondent’s financial position due to COVID-19, they must adduce cogent evidence regarding the specific industry in which the respondent operates and the respondent’s very particular circumstances, if they are to persuade the court that the downturn is likely to impact that particular claimant to the extent that a future costs award would not be met.

This article was first published on Practical Law.

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