Balancing Justice in Security for Costs Applications - Recent Guidance from the Court of Appeal
Defendants in commercial litigation are often concerned that even if they win and are awarded their costs, they will never recover them from an impecunious claimant. Obtaining or resisting security for costs is strategically significant for each side. A recent Court of Appeal decision in proceedings arising out of the collapse of Quinn Insurance Limited has confirmed a defendant's right to seek security and provides guidance for parties bringing (or defending) such applications in future.
Quinn Insurance Limited (Under Administration) v PricewaterhouseCoopers  IECA 109 relates to a claim for alleged negligence against the insurer's former auditor. The litigation is complex and the associated defence costs are estimated at more than €30m. The High Court previously refused to order security for costs on the basis of exceptional circumstances, namely the perceived public interest in finding out why the plaintiff collapsed.
The Court of Appeal has reversed that decision, clarifying three important considerations for such applications in future:
- The Court accepted the plaintiff's counterfactual argument that it might have been able to meet the defendant's costs if the defendant had fulfilled its supposed regulatory and contractual duties. The Court accepted this counterfactual because it was grounded in fact, supported by appropriate expertise, and was not based on speculation or unreasonable inferences.
- The Court held that, in exercising its discretion as to whether security should be provided, the balance may be tipped in favour of granting security if the provision of security will not stifle a plaintiff's claim.
- The Court reiterated that there was a heavy burden in establishing that a case was of exceptional public importance. While this claim did involve interests which went beyond the interests of the plaintiff (in that the State may ultimately benefit from any damages award) and the case could clarify the extent of the duty of care owed by an auditor to its clients, these considerations did not constitute issues of exceptional public importance justifying a departure from the requirement to provide security for costs.
Security for costs is an important protection for defendants to ensure that they are not left with significant legal costs they cannot recover after successfully defending litigation, due to a corporate plaintiff having insufficient assets. It also can ensure that defendants with a good defence are not forced into a settlement with such a plaintiff simply to avoid the costs of defending a weak claim. However, there is a balance to be struck between the unfairness of successful defendants being unable to recover their costs, and the constitutional need to ensure access to justice for financially weak corporate plaintiffs with potentially strong claims.
The Court of Appeal engaged in that balancing exercise in these proceedings, overruling the High Court's refusal to order that security be provided by the plaintiff.
Accepting the counterfactual
Section 52 of the Companies Act 2014 gives the Court discretion to grant a defendant security for costs if (a) the defendant has a bona fide defence and (b) it appears that the corporate plaintiff will not be able to pay the defendant's legal costs if the defendant is successful.
Neither of these factors were in dispute in Quinn: (a) it was accepted that the defendant has a bona fide defence and (b) it was clear that the plaintiff – a company in administration, not trading, and with debt of €1.1bn – would not be able to meet the defendant's costs if the claim failed. However, even when these thresholds are met, the Court still has discretion not to grant security if the plaintiff can establish that special circumstances apply. In Quinn, the first special circumstance that the plaintiff relied upon (and which has been previously recognised by the Courts) is that a plaintiff should not have to provide security if the inability to meet a defendant's costs flowed from the defendant's alleged wrongdoing.
The plaintiff argued that if the defendant had fulfilled its regulatory and contractual duties, certain matters would have been brought to the attention to the plaintiff's board and the plaintiff might have taken steps to safeguard its position. In such circumstances, the plaintiff could have been in a position to discharge the defendant's costs.
The plaintiff's counterfactual argument was based on detailed evidence and pleadings, including affidavit evidence from one of the plaintiff's administrators, an expert insolvency practitioner. The Court of Appeal agreed with the High Court's findings that "this was an opinion of an expert not to be characterised as mere speculation, as it was grounded on fact and not reliant on unreasonable inferences or conclusions". The Court of Appeal added: "I accept that Quinn’s evidence and reasoned argument, prima facie, show that had the auditors identified the two major risk factors to its solvency at an early stage, Quinn might have recovered its financial position and avoided the catastrophic insolvency that ensued. It could not be said, in my view, that any of these averments on affidavit are mere speculative assertions. They are concrete examples of the type of provision that Quinn says it could, and would, have made that would have reversed the slide towards insolvency."
The stifling effect of security
Notwithstanding its acceptance that the plaintiff had established a prima facie case that its inability to meet the defendant's costs was due to the defendant's own actions, the Court of Appeal noted that its statutory discretion required finding "the balance of justice between the parties".
One key consideration was whether an order for security for costs would stifle the plaintiff's ability to bring its claim. The Court of Appeal noted that the plaintiff did not contend that such an order against it would have that effect.
It held that: "If the order to provide security will not stifle a claim, the court might consider that this fact alone could tip the balance: the plaintiff provides security but can still continue the action; the defendant’s right to collect costs if it is successful is adequately protected. This approach might inform the discretionary process in a suitable case." (Significantly, the Court emphasised that the converse would not hold i.e. the fact that an order to provide security for costs would likely stifle a claim was not by itself a sufficient answer to such an application).
Since the plaintiff had financial backing for its own legal costs, benefited from limited liability, and could continue the litigation regardless of whether security was ordered, the Court concluded that the balance of justice lay in favour of granting security. This conclusion was reinforced by the unfairness of the defendant having to cover its own likely legal costs of €30m even if successful (particularly so in circumstances where the defendant did not have limited liability and its individual partners would be liable for these costs).
Exceptional public importance
The second special circumstance relied upon by the plaintiff was that the case raised issues of exceptional public importance. The Court of Appeal reversed the High Court's findings that security should not be granted on this basis. The Court held that it was private, commercial litigation and the plaintiff's arguments did not meet the heavy burden of establishing the exceptional nature of the litigation. The Court also rejected arguments that the case involved an assessment of the regulatory framework (and therefore was of exceptional public importance) or that there was an exceptional public interest in clarifying the obligations of auditors of insurance companies.
It is of note that the Court distinguished the concept of public importance in this context from the test applied by the Supreme Court in determining whether to hear an appeal. The Supreme Court's test focuses on whether there is general public benefit in the relevant legal principles being clarified.
This decision provides useful guidance as to the evidence required to resist an application for security for costs on the basis that the defendant's actions caused the plaintiff's financial difficulties. It also shows that a key consideration for the Court will be whether such an order would make it unlikely that the plaintiff could pursue the claim.
For more information, please contact Liam Kennedy, partner, Don Collins, associate or Dr Stephen King, associate or your usual contact on the A&L Goodbody Disputes team.
Date published: 27 April 2020