11 July 2023: Jon Felce (Partner) and Tulsi Bhatia (Associate) of Cooke, Young & Keidan LLP discuss a recent unreported case in which they were involved concerning an application for security for costs against a Ukrainian claimant
Orders granting security for costs are designed to protect parties (often defendants) from the risk that, if successful, they will be awarded their costs but be unable to recover them. Strategically, making an application for security for costs at an early stage can be extremely effective, leading to claims being stayed or even dismissed if orders for security are not complied with. However, courts and tribunals face a balancing exercise when exercising their discretion as to whether or not to grant security for costs, taking into account amongst other factors whether it is just to make the order and whether such an order might stifle a genuine claim.
Yet how is that balancing exercise to be undertaken in times of conflict and crisis, whether economic or political? Such situations could arise when, for example, there are currency restrictions and in that regard Wikipedia lists over 30 countries which currently have foreign exchange controls. Amongst those countries is Ukraine which, since the imposition of martial law, has had various currency control restrictions in place. In a recent High Court case in England, the Court had to grapple with the impact of such restrictions on an application for security for costs against a Ukrainian claimant (“X”). X had commenced proceedings pursuant to section 68 Arbitration 1996 (“AA96”), seeking to set aside a substantial LCIA arbitration award against it. X’s position was that its assets were all in Ukraine and that to order security would be to stifle the claim in circumstances in which Ukrainian law would prevent it from satisfying such an order.
The defendants’ application against X was made under section 70(6) AA96. This not only entitles the court to grant security for costs of an application or appeal under AA96, but gives it the power to dismiss the application or appeal if the order is not complied with.
The relevant principles include the following:
- The court must act in accordance with the overriding objective and the correct approach is the same as under Civil Procedure Rules 25.12 and 25.13, which govern security for costs in court proceedings.
- Under CPR 25.13(1)(a), the court can grant security for costs if it is satisfied, having regard to all the circumstances of the case, that it is just to make an order. The court is similarly required to have regard to all the circumstances of the case when deciding the amount of security and manner and time in which it is provided.
- The basic question is whether the respondent to the application for security for costs has sufficient assets, and whether those assets are available to meet any order for costs.
- Amongst the relevant factors are whether:
- There has been any manifestation of an intention to pay or to resist payment of the sums due;
- Whether or not the types of assets that might be available are liquid; and
- Whether a claim would be stifled by an order for security for costs. In that regard, the respondent needs to demonstrate it is more likely than not that its claim would be stifled. That is not something that is assumed in a respondent’s favour, but must turn upon the evidence which needs to be “full, frank, clear and equivocal”. The respondent has the burden of showing that it is unable to provide security not just from its own resources but by way of raising the amount needed from others that could assist it in pursuing its claim, such as relatives and friends.
- When exercising its discretion under section 70(6) AA96 to order for security for costs, the power must not be exercised on the ground that the appellant is an individual ordinarily resident outside the United Kingdom.
- Where the court determines that it may be effectively impossible to enforce an order for costs, that would provide objective jurisdiction for ordering security. However, if on the evidence it appears that there is a realistic prospect of enforcement against the respondent in the overseas jurisdiction, security is likely to be limited to the additional costs incurred in the process of enforcement.
The application for security for costs
The basis for the application for security for costs against X was that the respondents had concerns that X did not have available sufficient assets to meet their costs of defending the section 68 challenge, such that there was risk of delay or default in enforcement. This was said to be the case on the basis that (i) the respondent’s asset position was alleged to have been unclear, (ii) there were reasons to suppose that the respondent had assets outside the Ukraine, (iii) the position was obscure enough to make enforcement difficult, (iv) indications of an intention to resist payment, and (v) readily transferrable or disguisable assets.
The respondent’s case was that the court should be careful to avoid stifling a claim or to order security just because it was based abroad. Its position was that its assets were all in the Ukraine and to order security would be to stifle its claim. The respondent’s evidence was that Ukrainian law prevented it from paying due to cross-border payment restrictions. It also gave some evidence that nobody outside of the Ukraine was willing to assist financially to a sufficient extent. Finally, the respondent’s case was that a Ukrainian court would enforce an order for costs as a matter of reciprocity, such that (if security was ordered) enforcement would not be impossible or substantially more difficult (something on which it was stated that the applicant had not produced any evidence).
Nevertheless, the court considered that it was appropriate to order security in this case, because it was unclear what the respondent’s means were and whether they were readily available for enforcement. The respondent’s contention that such an order would stifle its claim was not accepted, because the respondent was adjudged to have failed to set out its asset position clearly and unequivocally. Not only had it failed to provide sufficient evidence of its assets and their nature and structure, but the respondent’s evidence as to the question of support from third parties was considered to be partial. Further, the court was concerned about various transactions and the respondent’s approach to the payment of prior costs orders in the arbitration. Nor had the respondent expressed any intention to satisfy an adverse costs order.
The judge further concluded that enforcement in the Ukraine would be problematic, particularly in the current circumstances, and therefore did not limit the security ordered as to the costs of the additional burden of enforcing there.
The court also ordered that the respondent’s claim be dismissed if the order for security for costs was not complied with.
Form of security
It was common ground that Ukrainian law prevented the payment of cross-border transfers unless any exemption applied (which it was agreed was not the case here). The applicants offered to accept an irrevocable bank guarantee issued or counter-backed by a Ukrainian bank to address this issue. The respondent had provided some evidence that there were difficulties in obtaining such a guarantee in practice. However, based on the limited available evidence, the court concluded that it appeared that a bank guarantee, either in favour of a Ukrainian entity or for payment in Ukraine, or effectively a guarantee for suspended payment, was permitted.
In order to accommodate the difficulties on the ground, the court therefore permitted the respondent to choose from various modes of providing security, so that it could either pay the ordered security into court, or provide an irrevocable bank guarantee issued or counter-backed by a Ukrainian bank.
Finally, the court dealt with the timing for payment of security. The respondent had argued that security should be ordered in stages, not least given the difficulties it would face. However, the judge decided that this was impractical in the circumstances of the case, but was prepared to grant the respondent additional time to provide security, namely 21 days instead of the usual 14. The judge also expressed that she expected a degree of realism from the applicants if problems were genuinely being encountered in obtaining a guarantee.
This case highlights that, if a respondent to a security for costs application is to resist the granting of security on the basis that its claims will be stifled (including in times of conflict), it will need to provide full, frank, clear and unequivocal evidence about its asset position including its nature, location and structure. Even then, the flexible remedies available to an English court may lead to it finding a workaround to any suggestion of stifling.
Postscript – Security for costs and sanctions
Of course, currency restrictions may not be the only impact of a conflict. The current crisis has also led to the imposition of sanctions, the effect of which on security for costs has also been considered recently by the English Court. In the recent case of PJSC National Bank Trust v Mints  EWHC 118 (Comm), the court was faced with arguments from the defendants that the Sanctions and Anti-Money Laundering Act 2018 (“SAMLA”), and the Russia (Sanctions) (EU Exit) Regulations 2019 (“the 2019 Regulations”) made under section 1 of SAMLA prevented the Claimants, one of which was designated under the sanctions regime and the other which was alleged by the defendants to be designated, from complying with an adverse costs order and satisfying an order for security for costs.
Paragraph 3 of Schedule 5 of the 2019 Regulations permits OFSI to issue a licence to a designated person to enable the payment of “reasonable professional fees for the provision of legal services” and “reasonable expenses associated with the provision of legal services”. In the Mints case, the court interpreted “reasonable professional fees” and “reasonable expenses” as entitling OFSI to licence a designated party to satisfy adverse costs orders and security for costs. It had been common ground that OFSI could issue a licence entitling a designated person to pay its own lawyers, and the Court determined that there was nothing within the language of paragraph 3 that limited licensing to fees incurred by a designated person’s own lawyers alone. This was also found to be consistent with the overall intention of the 2019 Regulations to achieve a workable solution to enable litigation to progress (the risk otherwise being that it could be argued that a stay was justified, undermining a designated party’s access to justice). In that regard, the payment of adverse costs (and thereby the provision of security for the same) were a routine and necessary feature of litigation, and an adverse costs order would have the effect of diminishing a designated person’s assets and therefore be said to further the objective and purpose of the 2019 Regulations. The judge also noted that her conclusion aligned with OFSI’s views, and indeed that OFSI had issued a licence permitting the payment of a prior adverse costs order.
It is understood that this decision is subject to an appeal, which was heard over a four-day hearing commencing on 3 July 2023. It remains to be seen what position the Court of Appeal takes.