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Security for costs and the corporate plaintiff - paying for the privilege of limited liability?

28 January 2011

The usual costs rule in litigation is that the losing party pays the winning party's reasonable legal costs. If a Defendant fears that a Plaintiff will not or will be unable to pay those costs, it can attempt to safeguard against that risk by bringing an application for security for costs.

In a recent decision in the ongoing case of Café de Lecq Limited v R A Rossborough (Insurance Brokers) Limited [2011]JRC011, in which Bedell Cristin represent the Plaintiff, the Royal Court considered, on appeal, the principles upon which the Court should exercise its wide discretion whether or not to order security for costs.  

The background
In the case in question, the Plaintiff, a local Jersey company, brought a claim for professional negligence against its insurance broker in respect of losses arising from a fire which destroyed the Plaintiff's premises. The fire and the destruction of the Plaintiff's premises rendered the Plaintiff impecunious, a point which was not disputed at first instance or on appeal. The Defendant brought an application for security for costs before the Master, driven by its concern that if successful at trial, the impecunious Plaintiff company would be unable to meet any adverse costs order made against it

The Master's decision
When the matter first came before the Master for consideration, it was not disputed that the Plaintiff was impecunious and was only able to bring its claim because it is being funded by its beneficial owner. It was also conceded that he could put up security if required to do so and so no question of the action being stifled through the ordering of security arose on the facts. In England, there is a principle encapsulated in section 726 of the English Companies Act 1985 to the effect that where a plaintiff is a company with insufficient assets of its own to meet the defendant's costs if successful in his defence, the court may require security to be given for those costs and may stay the proceedings until this is done. There is no equivalent statutory provision in Jersey. The Defendant nevertheless argued that this English statutory principle was enshrined in Jersey law by reason of earlier decisions of the Jersey court and invited the Master to apply that principle in the present case. The Master refused the Defendant's application for security.  He did not accept that there is a principle in Jersey which means that an impecunious Jersey company should provide security. There is a presumption that Jersey resident plaintiffs, corporate or individual, should not be ordered to provide security unless exceptional circumstances exist and he found none in the present case. Having carried out a balancing exercise as to the potential prejudice to the Plaintiff and to the Defendant in ordering or not ordering security, he found that the balance weighed against such an order being made. The Defendant appealed.

The appeal
On appeal, the Royal Court determined that:

  • There is no presumption or principle that Jersey resident corporate plaintiffs are not required to provide security for costs or that security for costs orders will only be made against Jersey resident corporate plaintiffs in exceptional circumstances.
  • The principles to be applied when considering an application for security for costs against a corporate plaintiff are those set out in the Jersey case of A E Smith & Sons Limited v L'Eau des Iles (Jersey) Limited [1999]JLR 319, namely that, amongst other things, the court has a wide discretion whether to order security and must carry out a balancing exercise when determining whether or not to order security weighing up the potential injustice to the plaintiff if security is ordered and the injustice to the defendant if security is not ordered. 
  • The court is concerned with the effect of such an order upon the corporate plaintiff, and not upon its directors, beneficial owners or other backers. 
  • The possibility that a successful defendant may be able to apply for a costs order against a third party in the event the assets of the unsuccessful corporate plaintiff are insufficient to meet its costs should not be taken into account.

Rule 4/1(4) of the Royal Court Rules 2004 provides that "any plaintiff may be ordered to give security for costs". On appeal in the present case, there was lengthy debate before the court as to whether or not English statutory principle concerning applications for security for costs against corporate plaintiffs should be applied in Jersey. The Royal Court determined that the adoption of such principle had already been confirmed by the Jersey Court of Appeal in the Smith case, which involved an insolvent resident corporate plaintiff, and confirmed again more recently by the Court of Appeal in Leeds United v Admatch [2009]JCA097.

Leeds United v Admatch was concerned with the impact of the European Convention on Human Rights ("ECHR") on orders for security. Prior to the introduction of the ECHR, the general practice under Jersey law in respect of security for costs, consistent with the policy that there should be access to justice for all, was that resident plaintiffs tended not to be ordered to pay security but non-resident plaintiffs were, primarily because of the potential difficulty and delay in enforcing judgments for costs in foreign jurisdictions.

In Leeds United v Admatch, the Court of Appeal held that requiring non-resident plaintiffs to provide security was discriminatory on grounds of status. Following Leeds United v Admatch, the Royal Court in the present case said that "it will be the general practice of the Court not to require plaintiffs (wherever resident) to provide security because there is reason to believe they will be unable to meet orders for costs against them save in the case of:
(i) corporate plaintiffs (wherever resident) where security may be ordered on such grounds following the principles set out by the Court of Appeal in A E Smith; and
(ii) non resident plaintiffs who may be required to provide security to meet the legitimate objective of protecting the ability of defendants to enforce costs judgments outside the jurisdiction to be assessed on an individual basis".

Such a decision is perhaps surprising given the conclusions reached in Leeds United v Admatch concerning discrimination on the ground of residence. The Plaintiff in the present case argued that no distinction should be drawn between individual and corporate plaintiffs, in the absence of Jersey statutory intervention allowing it, since to do so would be to discriminate on grounds of status.  The Royal Court rejected this argument on the basis that there is a basic distinction between a natural person and a company.  

Earlier English authority has suggested that, in return for the privilege of limited liability conferred on a company, any such company must concede the obligation to provide security if its assets appear insufficient to meet any adverse costs order that may be made against it, a point which appears to have found favour with the Royal Court. The difference between Jersey and England, however, is that England has legislation which provides for this, Jersey does not. 

The Royal Court's ruling that, when considering an application for security against a corporate plaintiff, it is concerned with the effect of such an order upon the corporate plaintiff only, and not upon its directors, beneficial owners or other backers, is surprising.  The Plaintiff had contended that ignoring the position of the party funding the action was to ignore the reality of the situation. The Master had been prepared to accept this argument, saying it formed part of the exercise of the discretion.  On the present facts, the beneficial owner of the Plaintiff chose not to put in evidence as to his financial circumstances so little turned on the point. In future cases, it seems likely that the position of the third party funder could be a highly material consideration and to ignore such information when exercising the discretion seems open to the criticism that it amounts to a failure to exercise the discretion judicially. 

This latest decision of the Royal Court is an important local authority on the principles to be applied to applications for security for costs. In the case of an impecunious corporate plaintiff, even though its impecuniosity may have been caused by the defendant, it seems that limited liability is a privilege for which the corporate plaintiff may have to pay by putting up security. It is important to remember, however, that impecuniosity of itself will not give rise to an order for security against the corporate plaintiff.  As against corporate plaintiffs, the court must still consider the principles set out in A E Smith. 

One of the driving considerations behind the decision was the view that there should be a level playing field when it comes to litigation. The impecunious corporate plaintiff should not be allowed to use its impecuniosity to bring pressure to bear on the more prosperous defendant. It is early days and the impact of this decision in practice has yet to be seen, whether in terms of increased numbers of applications or otherwise.

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