Autoweld Systems Ltd v Kito Enterprises LLC

The Court of Appeal dismissed the claimant's appeal against an order requiring security for costs under CPR rule 25.13(c). The court confirmed that the rule is forward-looking and the judge was entitled to consider the position at the conclusion of the proceedings when assessing whether there was reason to believe the claimant would be unable to pay the defendant's costs.

The court rejected the submission that unpaid invoices held by the defendant should be treated as effective security for costs, explaining that an equitable set-off does not operate in the same manner as a readily available fund for payment of costs at the end of the litigation. The judge was entitled to look behind the company accounts and to take into account the likely effect of an adverse substantive judgment and counterclaim on the claimant's assets.

Exercising his discretion on all the circumstances, including the claimant's fragile net asset position and the substantial counterclaim, the judge was within his discretion in ordering security in the sum he did; the appellate court would not interfere.

Background and parties:

• The claimant, a UK company supplying automatic welding machines, contracted with the defendant, a company registered outside the jurisdiction, to perform welding on an Iranian pipeline. The contract required 16,400 welds. The defendant terminated the contract after the claimant had completed under half the welds.
• The claimant sued for sums said due under invoices (partly sterling, partly US dollars) and for lost profits; the defendant pleaded that the claimant had repudiated the contract and counterclaimed for substantial losses and other relief including an account of advance payments and delivery of project records.

Nature of application and procedural posture:

• The defendant applied under CPR rule 25.12/25.13 for an order requiring the claimant to provide security for costs; HHJ Langan QC ordered security of
  80,000 and that the claim stand dismissed if security was not provided. The claimant appealed on three grounds challenging (1) the finding that there was reason to believe it would be unable to pay costs, (2) that it was just to make the order, and (3) the quantum of security.

Issues framed:

• Whether there was a reasonable basis under CPR rule 25.13(c) to believe the claimant would be unable to pay the defendant's costs if ordered to do so;
• Whether, having regard to all the circumstances, it was just to order security for costs when claim and counterclaim largely arose from the same facts;
• Whether the amount ordered (
  80,000) was reasonable.

Court's reasoning and subsidiary findings:

• The court held that CPR rule 25.13 is forward-looking and requires assessment of the claimant's position at the end of the proceedings; the likely outcome if the claimant failed to establish its claim may be that the claimant itself would be found in breach and liable on the defendant's counterclaim.
• The unpaid invoiced sum could not be treated as substitute security for costs. The court explained that, if the defendant recovered on its counterclaim, that recovery would take account of the invoiced sum by way of set-off and there would be no separate fund in the defendant's hands from which to meet its costs. Treating invoices as de facto security risked giving the defendant security for part of its substantive claim as well as for costs.
• The judge was entitled to look behind the accounts (which showed low net assets) and to consider the risk that the claimant would not be able to meet an adverse order at the end of the case. It was not an error for the judge to make an order without additional evidence of dissipation.
• On the exercise of discretion, the court surveyed authorities on mutual claims and counterclaims and noted that coincidence of issues is an important but non-determinative factor. Given the claimant's fragile financial position and the substantial counterclaim, the judge was entitled to make the order and to fix the sum as he did; fixing security is not an exact science and the figure fell within his discretion.

Relief sought: The defendant sought an order for security for costs; the claimant sought to overturn the order.

Wider context: The court emphasised the discretionary nature of security for costs applications and the need to consider the forward-looking position, equitable set-off and the risk to a defendant of being unable to recover costs if the claimant is impecunious. The appeal was dismissed.

The appeal was dismissed. The Court of Appeal held that CPR rule 25.13(c) is forward-looking and the judge was entitled to conclude, on the material before him, that there was reason to believe the claimant would be unable to pay the defendant's costs if ordered to do so. The unpaid invoices could not properly be treated as security for costs and the judge did not err in the exercise of his discretion or in fixing the sum ordered.

Appeal from an order of His Honour Judge Langan QC dated 19 March 2010 (Queen's Bench Division, Leeds District Registry) requiring the claimant to provide security for costs; hearing in the Court of Appeal resulting in judgment [2010] EWCA Civ 1469 (17 December 2010).