Newman (t/a "Newman Associates) v Wenden Properties Ltd & Anor

On an application for security for costs concerning a counterclaim, the court must first decide whether the counterclaim is a genuine independent claim or merely a substantive defence. A counterclaim involving distinct issues, additional evidence and independent losses may properly attract security.

Where the statutory threshold is met, the court retains a broad discretion. In considering whether security would stifle a genuine claim, the claimant must show that stifling is probable and must address the availability of funding from outside sources. The court may consider the claim’s bona fides, prospects, the timing and conduct of the application, and the relationship between claim and counterclaim. Security should be proportionate and may be limited to an appropriate procedural stage.

The claimant sought payment of professional fees arising from refurbishment works. The defendant advanced a substantially larger counterclaim alleging breach of contract and professional negligence, including excessive refurbishment costs, loss arising from variations and premature certification of practical completion.

The claimant applied for security for the costs of defending the counterclaim under section 726(1) of the Companies Act 1985. The defendant accepted that it could not meet an adverse costs order but argued that security would stifle a genuine claim and that its financial position resulted from the claimant’s alleged defaults.

The central issues were whether the counterclaim was merely defensive or had independent vitality, whether it had a reasonable prospect of success, whether it would probably be stifled, and the appropriate amount and stage of any security.

1. The application for security was granted. The defendant was ordered to provide security of £45,000 up to the exchange of witness statements. Security for the whole counterclaim, or up to a preliminary issue hearing, was not ordered.

2. The threshold under section 726(1) of the Companies Act 1985 was satisfied because credible evidence showed that the defendant would be unable to pay the claimant’s costs if the counterclaim failed. The remaining question was the exercise of the court’s discretion.

3. The counterclaim was a separate claim rather than merely a defence to the fee claim. Applying the substance-over-form approach in Hutchinson Telephone (UK) Ltd v Ultimate Response Ltd [1993] BCLC 307, it raised independent issues concerning cost advice, contractual and professional duties, causation, hypothetical decisions and loss. It therefore had independent vitality and could attract security.

4. The court considered the principles governing bona fides, prospects of success and alleged stifling. The primary non-transaction case was weakened by the valuation evidence, which suggested that the defendant had suffered no recoverable loss on its pleaded figures. The alternative claim might have prospects if contractual or factual duties concerning cost advice were established, but the pleaded case presently gave the impression that the claimant was being treated as having guaranteed the contract price. That was not a legitimate basis for professional negligence.

5. The defendant had not shown that security would probably stifle a genuine claim. It had not established that funding could not be obtained from outside sources. The evidence suggested possible equity in properties owned by Dr and Mrs Iddenten and in the refurbished property itself. The defendant’s lack of assets was also a consequence of its original structure and was not shown to have resulted from the claimant’s default.

6. The amount of security had to reflect the present procedural position and remain proportionate. Recent disclosure required the defendant to reconsider and possibly amend its case. A preliminary issue was therefore premature, and security was limited to the exchange of witness statements, subject to later reconsideration if circumstances changed.

First-instance decision in the Technology and Construction Court. No appellate history is stated in the judgment.