Lobster Group Ltd v Heidelberg Graphic Equipment Ltd & Anor

Pre-action costs may in principle be included in security for costs, but the discretion should be exercised cautiously. Costs of a separate pre-action mediation will ordinarily fall outside the costs of and incidental to subsequent proceedings, particularly where the parties agreed to bear their own mediation costs. Delay is relevant both to whether security should be ordered and to its amount. Historic costs, especially where the pre-action period was lengthy, may make security penal or oppressive. Post-commencement delay does not require a reduction where the applicant acted reasonably, the claimant suffered no material prejudice, and the proceedings remain some way from trial.

The claimant, a company in liquidation, brought proceedings concerning alleged defects in a printing press purchased from the first defendant and financed by the second defendant. Both defendants sought security for costs under CPR Part 25 and section 726(1) of the Companies Act 1985. The claimant accepted that security was appropriate, but disputed the inclusion of pre-action costs, costs incurred before the applications, and the amount sought.

The central issues were whether pre-action mediation costs and other historic pre-action costs could be secured, whether delay in applying for security should reduce the amount, and the appropriate cut-off and quantum for future costs.

1. The applications were granted. The claimant was ordered to provide security of £37,000 to the second defendant and £70,000 to the first defendant, in each case up to the exchange of witness statements.
2. Under section 726(1) of the Companies Act 1985 and CPR Part 25, pre-action costs may in principle be the subject of security. The discretion must nevertheless be exercised cautiously. Relevant considerations include the age and extent of the costs, the risk that security becomes penal, possible disputes about recoverability, and any arguable insolvency or preference issue.
3. The costs of the separate pre-action mediation were not recoverable as costs of and incidental to the proceedings. The mediation was an independent form of alternative dispute resolution, took place about two and a half years before proceedings, and was subject to an agreement that each party would bear its own costs. That agreement could not be reopened absent a specific agreement to do so. The possible exception for materials produced for mediation and later used in the action was not established on the evidence.
4. The alleged stifling of the claim was rejected. There was no evidence that after-the-event insurance or other funding was impossible to obtain. The authorities also required the court to avoid examining the merits in detail and to consider whether security would probably prevent a claim with a reasonable prospect of success.
5. Delay after commencement did not justify reducing security. The applications were made at the first case management conference, security had been raised since October 2007, and there was no material prejudice because the trial remained some way off. Security was therefore limited to the exchange of witness statements, rather than the eve of trial.
6. The first defendant’s pre-action costs were excluded. Its post-commencement costs were assessed at £20,000, added to the claimant’s reasonable estimate of £50,000. The second defendant’s agreed figure of £37,000 was ordered.