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15 September 2020
Evidence of the adverse impact of the COVID-19 pandemic on the claimant's financial position was not enough to show an inability to pay adverse costs in a recent application for security for costs in the High Court (International Pipeline Products Limited v IK UK Ltd).(1)
The claimant and the first defendant provided products and services for the maintenance and repair of pipelines for the oil and gas industry. Shortly after negotiations over the 12th defendant's acquisition of the claimant failed, the first defendant was established as a business. It is alleged that some of the claimant's employees (which are defendants in the proceedings) created and implemented a business plan for the first defendant and, among other things:
Civil Procedure Rule 25.13 sets out the conditions to be satisfied before security can be ordered. The condition relied on in this case was that there was reason to believe that the claimant would be unable to pay the defendants' costs if ordered to do so. In addition, the court must be satisfied, having regard to the circumstances of the case, that it is just to make an order that security be given.
A defendant need show only that there is reason to believe that the claimant will not be able to pay when the order is made, not that the claimant will not, on the balance of probabilities, be able to pay.(2)
The defendants pointed to the current COVID-19 pandemic and the looming economic downturn, among other things, to attempt to persuade the court that there was reason to believe that the claimant would fail to meet an adverse costs order of £800,000 to £900,000 of likely costs in October/November 2021.
The defendants submitted evidence of the impact of the economic downturn on the oil exploration industry and referred to compounded instability in the oil market, such that the financial position of the claimant's third-party financial backers may deteriorate. The claimant itself admitted that the COVID-19 pandemic had led to an approximately 10% drop-off in enquiries, but asserted that it was in a good financial position and expected to continue to trade well.
The court accepted that the claimant's business was a successful one and that it expected to continue to make money. While it was fair to say that it was impossible to know what was going to happen at any point in time, the court was not persuaded by the defendants' evidence on the impact of the pandemic on the oil exploration industry, as the claimant operated in pipe maintenance and repair.
Ultimately, the court held that there was no reason to believe that the claimant would be unable to pay the defendants' costs if ordered to do so, and that having regard to all of the circumstances, it was not just to make an order for security for costs.
This decision demonstrates the court's willingness to consider the impact of the COVID-19 pandemic and the looming economic downturn in considering a party's financial viability for the purposes of a security for costs application. However, general evidence of the pandemic's economic impact will not suffice; any evidence must be precise and specific to that particular party's industry in order to persuade the court that there is a real risk of non-payment.
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