Autoweld Systems Ltd v Kito Enterprises LLC

When considering security for costs against a company under rule 25.13(2)(c) of the Civil Procedure Rules 1998, the court must assess the claimant’s likely ability to pay at the end of the proceedings. A disputed sum claimed from the defendant provides no security where an equitable set-off may extinguish it.

The court retains a broad discretion based on all the circumstances. Overlapping issues between a claim and counterclaim, the consequences if security is not provided, and the counterclaim’s independent vitality are material but not individually decisive. The amount of security is assessed robustly; precise apportionment between closely connected claims is unnecessary.

The claimant supplied automatic welding machines, services and personnel for the defendant’s pipeline project. After the contract was terminated, the claimant sought unpaid invoiced sums and lost profits. The defendant denied liability and counterclaimed for substantial losses allegedly caused by the claimant’s breach.

HHJ Langan QC ordered the claimant to provide £180,000 as security for costs under rule 25.13 of the Civil Procedure Rules 1998, failing which its claim would stand dismissed. The claimant appealed, arguing that there was no sufficient basis for finding likely inability to pay, that security was unjust given the overlapping counterclaim, and that the amount was excessive.

The central issues were whether the invoiced sum could itself provide security, whether the judge had exercised his discretion justly, and whether £180,000 fell within the permissible range.

1. The appeal was dismissed unanimously. Rule 25.13(2)(c) of the Civil Procedure Rules 1998 is forward-looking. The court must consider the claimant’s likely financial position when an adverse costs order may have to be paid, rather than treating present cash or balance-sheet figures as conclusive.
2. The unpaid invoiced sum did not provide the defendant with security. If the defendant successfully established its counterclaim, equitable set-off would reduce its judgment by the invoiced sum. Requiring it then to take its costs from that amount would make it surrender part of its substantive recovery or bear its own costs. The counterclaim and invoiced claim were sufficiently connected, and the claimant had supplied no reason why equitable set-off would be unavailable.
3. The judge was entitled to look behind accounts which included the disputed invoices. If the defendant successfully defended the claim, its counterclaim would probably eradicate the invoiced asset. The claimant’s assets would also have been reduced by its own litigation costs. There was ample material for concluding that the claimant might be unable to pay the defendant’s costs at the end of the proceedings.
4. The justice of ordering security depended on all the circumstances. The overlap between claim and counterclaim, and the restrictions which dismissal of the claim would impose upon the claimant, were material considerations. Neither was determinative. There is no general rule requiring mutual security merely because both parties advance substantive claims. The court must examine the parties’ substantial positions and whether a counterclaim has independent vitality beyond the defence.
5. On these facts the defendant had not initiated the litigation and was not shown to have been about to sue. Its counterclaim represented its response to the claimant’s proceedings rather than an independently vital claim. The risk that it would recover neither its damages nor its costs justified the order. Although the invoiced claim differed from the parties’ largely mirrored breach claims, the judge was entitled to include it within the dismissal sanction.
6. The amount of security is not an exact science and may be assessed robustly. Investigation of which party breached the contract would generate most of the costs, while the ancillary remedies were closely connected. The £180,000 ordered was within the judge’s discretion.

1. Court of Appeal (Civil Division): The claimant’s appeal was dismissed unanimously. The order for £180,000 security for costs remained in force: [2010] EWCA Civ 1469.
2. High Court, Queen’s Bench Division, Leeds District Registry: On 19 March 2010 HHJ Langan QC ordered the claimant to provide £180,000 as security for costs, failing which its claim would stand dismissed. No citation is stated.