Automotive Latch Systems Ltd v Honeywell International Inc

For an application for security for costs, the applicant must establish, on the balance of probabilities, that the claimant will be unable to pay an adverse costs order when it is made. The court assesses that question by reference to the likely timing of the order and the claimant’s probable financial position then, rather than its position only at the application date.

Once jurisdiction is established, the court must balance the defendant’s protection against an unsatisfied costs liability with the risk that security will oppressively or practically stifle the claim. Assertions that security will damage the business are insufficient without evidence that the claim cannot be pursued. The amount ordered should reflect a reasonable estimate of recoverable costs and the burden imposed on the claimant.

Honeywell applied under CPR 25.13(2)(c) for security for its costs in substantial commercial proceedings brought by Automotive Latch Systems Ltd. The claim arose from a failed collaboration concerning the development and commercialisation of a vehicle-door latch system. Damages of up to £632 million were claimed after amendment.

Honeywell relied on ALS’s substantial present losses and argued that ALS would be unable to satisfy an adverse costs order. ALS contended that its business would generate sufficient income before judgment and that security would seriously damage or stifle the claim. The central issues were whether the jurisdictional condition was satisfied and, if so, whether security should nevertheless be refused or limited in the court’s discretion.

1. Jurisdiction. Honeywell established the jurisdiction to order security under CPR 25.13(2)(c). The relevant question was whether ALS would probably be unable to pay Honeywell’s costs if ordered to do so. The court accepted that a substantial trial would probably not result in a costs order until late summer or early autumn 2008. It therefore considered ALS’s likely position at that time, while allowing for the uncertainty of its projected trading income.

2. ALS’s accounts showed substantial negative funds and continuing losses. Its forecasts depended on prospective sales, but no firm orders had been placed and no sales income had been received. Any income would primarily accrue to VSS, a subsidiary, and there was no proper basis for assuming that VSS would transfer funds to ALS. It was accordingly probable that ALS would be unable to meet an adverse costs order.

3. Discretion. The court declined to take into account ALS’s contention that Honeywell had caused its financial difficulties. Deciding that issue would pre-judge a major issue in the underlying litigation. The merits did not materially favour either party at this stage, since both the claim and defence were reasonably arguable.

4. An order for security could divert funds from business development, but that was an ordinary consequence of security for costs. ALS had not provided sufficiently direct evidence that security would prevent it from pursuing the claim. The court therefore found no sufficient basis to refuse security as oppressive or claim-stifling. The amount sought, however, required moderation. Having regard to likely costs on the standard basis, the burden on ALS and its backers, and the relative work involved, £500,000 was appropriate rather than the £1.4 million claimed.

5. The court ordered security of £500,000. Honeywell remained entitled to seek further security for future costs not covered by the calculations, but any such application would have to be assessed in light of the circumstances then existing.