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22 January 2013
Under Irish procedure, the general rule is that costs 'follow the event' or, more simply, the winning party is generally entitled to its costs from the losing party. In cases where a defendant believes that the case against it is unmeritorious and that the plaintiff would be unable to meet any award of costs made in its favour, it can ask the court to make an order requiring the plaintiff to give security for its costs in the event that the plaintiff does not succeed. If ordered, the need to give such security serves as a condition of being permitted to proceed with the litigation. In this way, security for costs can represent a tactical step by which a defendant can bring pressure to bear on a plaintiff by seeking security for the defendant's costs from the plaintiff before the litigation can proceed further. The case law regarding security for costs is not insubstantial and was recently reconsidered in Oltech (Systems) Limited v Olivetti UK Limited. (1) Judge Charleton wryly observed that the fact that success in applications of this type will often bring litigation to an end explains "the lush profusion of authorities that has grown up", and counselled that such applications should be brief.
The plaintiff was the Irish distributor for Olivetti office equipment, supplied by the defendant. It had placed an order for 707 printers, which according to the specification involved would require replacement toner after printing a certain number of pages. The plaintiff entered into a contract with a third party for the supply of printers and the replacement of toner cartridges, the pricing in respect of which was allegedly premised on the specifications provided. This, however, proved unprofitable and the plaintiff refused to pay for the products as ordered, running up a debt of some €2.3 million. While the defendant claimed recovery of that sum in its counterclaim, the plaintiff acted pre-emptively and issued its own claim first for extra costs that it claimed were occasioned by the breach of contract by the defendant. Since its distribution arrangement was terminated as a consequence, it also sought further damages arising from the alleged wrongful termination. In total, the plaintiff claimed some €3 million from the defendant. As part of the proceedings, which had been entered into the commercial list of the High Court, the defendant sought security for its costs, on the basis that the plaintiff would be unable to meet the defendant's costs should the defendant succeed at trial.
The court noted at the outset that it is no part of the task of a court on an application for security for costs to take a view as to who ought to win at trial, and it cited Judge Clarke in Connaughton Road Construction Ltd v Laing O'Rourke Ireland Ltd (2) to that effect. Rather, the court noted that the task for the court was to apply the tests for security for costs as mandated by the law, rather than attempt to decide the case. Although there is a jurisdiction under the Rules of the Superior Courts to order security for costs, here the application was founded under Section 390 of the Companies Act 1963, which provides that:
"Where a limited company is plaintiff in any action or other legal proceeding, any judge having jurisdiction in the matter, may, if it appears by credible testimony that there is reason to believe that the company will be unable to pay the costs of the defendant if successful in his defence, require sufficient security to be given for those costs and may stay all proceedings until the security is given."
This, the court acknowledged, "may hit hard at an impecunious plaintiff company". However, in considering the application before it, the court noted that there are two basic requirements to meet before the discretion of the court to order security for costs may be invoked. In the first instance, the defendant must demonstrate that it has a reasonably sustainable defence. The court asked what constitutes a reasonably sustainable defence or – in more arcane language – a prima facie defence. In answering this question, it adopted the decision in Tribune Newspapers (In Receivership) v Associated Newspapers Ireland, (3) where Judge Finlay Geoghegan stated that a defendant must "objectively demonstrate the existence of admissible evidence and relevant arguable legal submissions applicable thereto which, if accepted by the trial judge, provide a defence to the plaintiff's claim". The second element of the test is for the defendant to show that the plaintiff is either insolvent or so financially challenged such that it would be unable to meet the defendant's costs if the defendant succeeded at trial.
In applying those tests here, the court noted that the defendant had shown that it had a defence to the plaintiff's claim and referred to a written acknowledgement of the debt due by the plaintiff to the defendant for the printers and toners. In addition, the court accepted that the defendant had demonstrated that should the case proceed to trial and be successfully defended, the plaintiff would likely be unable to pay any order for legal costs against it (which the plaintiff admitted).
Therefore, the court found that both elements of the test had been satisfied. The jurisdiction to grant the order sought made out, it then went on to consider whether any special circumstances militated against the award of security for costs.
The court identified that, notwithstanding its jurisdiction to make order sought in this case, in exercising its discretion (which was wide) it could take all the circumstances of the case into consideration. For example, it cited Irish Commercial Society Ltd v Plunkett (4) to the effect that a court may take into account the strength of the plaintiff's claim and the conduct of the applicant for security for costs. It also identified that a multitude of special circumstances (which were not finally settled) serve as an exception to the granting of an order for security for costs. These exist so as to enable cases to proceed even where there is a sustainable defence and despite a plaintiff's inability to pay such a costs order because the justice of the case might require it. The court cited authority to the effect that "it should be remembered that the essence of the order for security for costs (or not) is "to advance the ends of justice and not to hinder them". (5) It then went on to identify a number of relevant special circumstances or exceptions, as follows:
The court also noted that other special factors may also be identified, and reiterated that the categories of special circumstance were not closed and could be:
"isolated whereby, in the interests of attempting to see justice done, the court will decide against ordering security for costs notwithstanding that a company is shown not to be able to pay the costs of a successful defendant which demonstrates a prima facie defence. That is because the jurisdiction to make this order, whether under [Section] 390 of the Companies Act 1963 or under Order 29 rule 1 of the Rules of the Superior Courts, is a matter of discretion to be exercised in all the circumstances of a case."
Rather, the right to security for costs – even where the basic two-part test has been met – is not absolute and the court must exercise its discretion based on the facts of each individual case. (13) Here, the court refused to make the order as sought because of the interconnectedness of the claims advanced by the plaintiff and the counterclaims advanced by the defendant. To stay the proceedings absent security being provided would "prevent any proper analysis at trial of the performance or non-performance of the printers". In addition to falling within the sixth exception referenced above, the court felt that to order such security would run contrary to principles of constitutional fairness in terms of providing access to the courts to vindicate and defend legal rights. (14)
Although the case sets out no new principles of law, it does set out a useful summary of the basic test applicable to the award of security for costs, as well as the numerous exceptions. It also details how those exceptions are numerous and not fully defined. Accordingly, it is fair to say that although seeking security for costs can be a useful tactical weapon to deploy by a defendant, a party seeking the same should consider carefully whether an exception might be applicable which would disentitle it to the relief even if the basic elements of the test were met.
(5) In The West Donegal Land League Limited v Udarás na Gaeltachta,  IESC 29 (unreported, Supreme Court, May 15 2006), where Judge Denham quoted with approval from the decision of Judge Kingsmill Moore in Thalle v Soares  IR 182.
(7) See Framus Ltd v CRH plc,  2 IR 20. In Connaughton Road (supra note 2) Judge Clarke set out a test which required the plaintiff to be correct with regard to four relevant propositions (see Paragraph 3.4).
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