Pannone LLP v Aardvark Digital Ltd

In deciding whether to order security for costs against a company bringing a counterclaim, the court must consider all the circumstances and whether the counterclaim is, in substance, merely defensive or an independent claim. There is no rule of thumb based on overlap, pleading as set-off, or which party sued first. Relevant factors include the substance and scope of the counterclaim, the relative amounts claimed, and the degree of overlap between the issues.

If security in a substantial amount would probably stifle a genuine counterclaim, the court must not make an order which has that effect unless the circumstances justify it. The court must balance the claimant’s protection against unrecoverable costs with the defendant’s practical right of access to the court.

The claimant sued its former solicitors for unpaid fees. The defendant pleaded a substantial counterclaim alleging negligent advice concerning intellectual property claims and claiming approximately £3.5 million in losses, together with a smaller claim concerning trade mark infringement.

A District Judge ordered the defendant, a company known to be unable to pay the claimant’s costs, to provide security of £57,164, with the counterclaim stayed until security was given. The defendant appealed. The central issues were whether the counterclaim was in substance an independent claim rather than a defence, whether the evidence established that security would stifle it, and whether it was just to order security in those circumstances.

1. Appeal allowed. The order requiring security for costs was set aside.
2. Under CPR rules 25.12 and 25.13, the jurisdictional conditions were satisfied, but the decisive question was whether it was just to order security having regard to all the circumstances. No rule of thumb applied merely because the claim and counterclaim overlapped, or because the defendant relied on set-off. The court had to assess the substance of the litigation, including the extent of overlap, the relative amounts claimed, and whether the counterclaim had independent vitality.
3. The counterclaim crossed the boundary between an aggressive defence and an independent claim. It raised substantial issues beyond the claimant’s fee claim, claimed much larger sums, and involved questions of professional negligence, causation and loss. It was therefore prima facie a proper case for security, subject to the further circumstances.
4. On an application for security, the court should not conduct a detailed examination of the merits. Prospects may be considered only where one side clearly demonstrates a very high degree of probability of success. Neither side had done so here.
5. The evidence established that the defendant, its sole director and shareholder, and the relevant family member lacked worthwhile assets or access to funds. Security in any substantial sum would therefore stifle the counterclaim. The possibility of after-the-event insurance did not alter that conclusion, particularly as no evidence showed that such insurance could be obtained or funded.
6. The risk of stifling did not automatically prevent security in every case. The court had to balance the claimant’s risk of irrecoverable costs against the defendant’s access to the court. Applying Al-Koronky v Time-Life Entertainment Group Ltd [2006] EWCA Civ 1123, the court should not fix security at an amount known to be unaffordable. This was not an exceptional case in which a genuine counterclaim should nevertheless be stifled, and the appeal was allowed.
7. The court directed that the case should be closely case-managed because the defendant had failed to pay earlier costs orders.

1. High Court (Chancery Division): on appeal from the District Judge’s order of 14 December 2011, the appeal was allowed and the order for security for costs was set aside.