Nicholas G Jones v Environcom Limited & Anor

Security for costs may be ordered against a defendant who brings a counterclaim where, in substance, the counterclaim goes beyond self-defence and has an independent vitality of its own. The court must examine the substantial position of the parties rather than the formal shape of the pleadings. It is relevant if the defendant would probably have brought proceedings had the claimant not done so, particularly where either party could properly have commenced the litigation. Where claim and counterclaim arise from the same facts and either party could have been claimant, security for the counterclaim is not confined as a matter of law to additional or exclusively referable costs. The ultimate question remains whether security is just in all the circumstances.

The claimant insurers sought declarations that they had validly avoided insurance policies covering the defendants’ recycling facility, or alternatively that they were entitled to damages corresponding to sums otherwise payable. The defendants counterclaimed for indemnity and damages following a major fire, with losses estimated at approximately £2.9 million apart from unquantified business-interruption losses.

The insurers applied for security for the costs of the counterclaim under CPR Rule 25.13. By agreement, the court determined two preliminary issues: whether the counterclaim had an independent vitality of its own, and whether security was legally confined to costs exclusively referable to the counterclaim.

1. The preliminary issues were determined in favour of the insurers. The court stressed that the ultimate question under CPR Rule 25.13 was whether, assuming the jurisdictional condition concerning inability to pay was satisfied, it would be just to require security. The preliminary determination did not pre-empt the later discretionary assessment of all the circumstances.

2. The correct approach was one of substance rather than form. The counterclaim was not merely defensive. Although success on the insurers’ claim would necessarily resolve liability under the counterclaim, the defendants had an independent claim for indemnity which they needed to pursue in order to recover. The insurers could discontinue their declaratory claim and still defend the counterclaim.

3. It was also material that it was a matter of chance which party commenced proceedings. The defendants would probably have sued had the insurers not done so. That circumstance fortified the conclusion that the counterclaim had independent vitality.

4. Accordingly, security was not confined as a matter of law to additional costs or costs exclusively referable to the counterclaim. Where claim and counterclaim arise from the same facts and either party could properly have been claimant, the claimant may be secured in respect of the costs of the counterclaim, including costs relating to common issues.

5. The court therefore determined that security should be awarded in the full amount of the insurers’ costs of the counterclaim. Whether it was just, after consideration of all circumstances, to make an order for that amount remained for the restored hearing. Costs and consequential orders were reserved.