Supreme Court confirms that Irish security for costs orders are compatible with EU law
Supreme Court confirms that Irish security for costs orders are compatible with EU law
The Supreme Court this week delivered judgment in two separate security for costs appeals. The first was Quinn Insurance Ltd. (Under Administration) v. PricewaterhouseCoopers (A Firm)  IESC 15 (Quinn) and the second Protégé International Group (Cyprus) Ltd. v. Irish Distillers Ltd.  IESC 106) (Protégé). The Supreme Court has clarified the circumstances when a corporate plaintiff may be required to provide security for costs, and its compatibility with EU law. In both cases, security of €1m + was ordered.
In both cases it was accepted that:
the defendants had a bona fide defence;
the plaintiffs would be unable to meet an order for costs (based on cost estimates prepared);
special circumstances justifying a refusal to grant security for costs had to be established by the plaintiffs to avoid having to give security; and
this involved a consideration of whether the inability to pay (impecuniosity is the term used) was caused by the defendants alleged wrongdoing.
In Quinn, the Court reiterated the key legal principles determining when and how special circumstances, and in particular, causation of impecuniosity, might arise. The Court noted that the onus of proof is on the plaintiff in those circumstances, with the Chief Justice commenting that "parties are required to put their cards on the table if they want the Court to take a particular factor into account". It is not enough to make a bare assertion that the impecuniosity has been caused by the alleged wrongdoing, plaintiffs must make a real effort to come up with as much evidence as possible and disclose their accounts. They may even benefit from putting forward expert evidence.
In Protégé, the Court confirmed that security for costs orders are compatible in principle with EU law and the entitlement to have an effective remedy in competition law cases, as they are flexible and proportionate mechanisms with the legitimate aim of balancing both the rights of plaintiffs and of defendants.
It is crucial in applications for costs such as these that the required expertise (across competition law and litigation) are deployed effectively. These motions are brought early in proceedings and require considerable preparation.
Leave to Appeal
In both cases, the Supreme Court had granted leave to appeal based on the fact that there was an issue of general public importance as to whether the existing jurisprudence of both the High Court and the Court of Appeal on the question of security for costs may need to be considered, and possibly adjusted.
The Court was called on to consider
(i) the proper general approach to causation of impecuniosity and the public interest special circumstances, and
(ii) whether the general principles identified for the award or refusal of an order for security for costs when a corporate applicant is impecunious can be said to infringe the effective remedy requirements under EU law (including the Charter of Fundamental Rights).
In Quinn, The Supreme Court issued three judgments. The Chief Justice gave the primary judgement. He re-emphasised the balance that the security for costs mechanism attempts to achieve, noting that while plaintiffs are entitled to access to justice, "defendants are entitled to access to justice as well", pointing out that a defendant has no choice about being sued and that "just as the cost of bringing certain types of proceedings may prove a barrier to those who might have a good claim being able to vindicate their rights, so also can the cost of defending proceedings be a barrier to the rights of defence."
As noted above, the Court also emphasised the requirement for both parties to substantiate their claims, while avoiding a mini trial within a trial. The Court outlined that this may involve independent expert evidence but not necessarily so. What the Court made clear is that mere assertion will not be enough for either party. For example, the onus is on the plaintiff to produce whatever evidence they consider adduces causation of impecuniosity (with the Court concluding in this case that the Plaintiff had not made this out). Equally the Court will require a Defendant to substantiate their defence. For example in this case the Court had regard to the failure of the partners of the Defendant to give evidence as to their true exposure, having regard to whatever insurance may be in place.
The Court also highlighted the significant differences between the position of an impecunious plaintiff who is a natural person and an impecunious corporate entity, stating that a defendant in a case taken by the latter had far worse prospects of recovering its costs (as the company may simply be liquidated) and that this played a role in deciding whether to award security or not. He also noted that a corporate plaintiff has the option of acquiring a form of third party funding which does not breach the law of maintenance and champerty, being where a third party in substance buys into a cause of action by becoming a shareholder in the company which has the benefit of the cause of action concerned.
The Court also distinguished between an impecunious and insolvent plaintiff, noting that an impecunious plaintiff would not be able to pay costs in the event that the proceedings are unsuccessful and the defendant is awarded its costs, and that a plaintiff does not necessarily have to be insolvent for it to be in such a position.
In another welcome development, both the Chief Justice, and McMenamin J, in a concurring judgment, recommended a more flexible, broader approach to applications for security for costs, noting that in an appropriate case it may, for example, be sensible for the Court, where the proceedings are likely to be very expensive and protracted, to direct security on a staged or phased basis (by reference to important milestones within the case such as the completion and delivery of discovery) so that the matter can be reviewed from time to time in light of developments in the case.
With regard to the amount of security set, the Chief Justice outlined that in his view the default position should continue to be that full security in monetary form should be provided, but that the Court may depart from that position if it considers it necessary and appropriate so to do to minimise the risk of injustice.
Finally, the Chief Justice considered the question of stifling, i.e. the extent to which the Court can or should inquire into whether ordering security will, in fact, stifle the claim or make it unlikely that the proceedings will go ahead. Here he recommended that where causation of impecuniosity is not established, the Court should err on the side of greater inquiry and place at least some weight on an assessment of the extent to which the claim may be stifled, having regard to the overall balance of risk of injustice. He also noted that it is necessary for a plaintiff who seeks to rely on a public interest special circumstance to demonstrate that the proceedings are likely to be stifled if security is ordered. Ultimately he was not satisfied that the Quinn proceedings would be stifled by the Order for security made and therefore decided it was not necessary to decide whether the threshold for the public interest special circumstance had been met.
In Protégé, the Court adopted the approach detailed in Quinn, repeating the comments made in Quinn to the effect that there is an obligation on both sides to disclose their position and avoid speculation.
With regard to the type of evidence that might be put forward by a Plaintiff to establish causation of impecuniosity, the Court cited Costello J in the Court of Appeal, whose decision was the subject of the appeal, where she had detailed the kind of supporting evidence she would have liked to see put forward by the Appellants as follows:
"business plans…projections…evidence of funding to support any proposed expansion of the business…distribution agreements…affidavits from financial advisors or any other expert".
The Court held that the plaintiffs had fallen far short of presenting the kind of evidence which would be considered sufficient to meet the burden of proof on them to establish special circumstances such as to justify having no security ordered against them.
The Court also considered the possibility that the proceedings might be stifled if security was ordered, deciding that there was no evidence presented to enable the Court to assess the circumstances in which security might not reasonably be capable of being put up. The Court further held that as there was no evidence to suggest that the proceedings would not necessarily go ahead if security was ordered, it followed that the public interest special circumstance had also not been made out. The Court noted at this juncture that under Irish law, security should be ordered in this case, unless EU law required a different result.
It then turned to consider the whether the general principles identified for the award or refusal of an order for security for costs where a corporate plaintiff is impecunious can be said to in any way infringe the effective remedy or judicial protection requirements under EU law (including the Charter of Fundamental Rights). The Court noted that the correct test was that a right to an effective remedy will be breached if national procedural law renders it “practically impossible or excessively difficult” to exercise the rights conferred by EU law.
The Court cited DEB1 which states that, in order to assess proportionality, a national court may take account of the amount of the costs and whether or not those costs might represent an insurmountable obstacle to access to the courts, noting that this criterion closely echoed the stifling consideration identified both in Quinn and in Protégé.
The Court asked firstly, whether the Irish security for costs mechanism potentially interfered with the right of access to a court to enforce European rights and, importantly, whether it undermines the core or essence of that right. The Court determined that the requirement to put up security does necessarily interfere with the right of access to the Court, but does not undermine the core or essence of the right to an effective remedy.
Secondly, the Court considered whether an order for security for costs is designed to meet a legitimate aim recognised under EU law. The Court decided that as the Irish law on security for costs forms an important part of the protection of the rights of defence, it can be said to pursue a legitimate aim under EU law as recognised in the jurisprudence of the Court of Justice of the European Union.
Finally, the Court considered whether or not the Irish security for costs mechanism is proportionate to that aim. Here the Court determined it was and in so doing, took into account a number of factors, including:
A plaintiff's exposure to costs will only arise in the event that the proceedings are unsuccessful and costs are awarded against the relevant plaintiff;
There is no element of penalty involved;
The requirement to put up security does not place an impecunious corporate plaintiff in any different position to a corporate plaintiff that has sufficient funds;
That a plaintiff who can establish that there is an arguable basis for suggesting that their impecuniosity was due to the wrongdoing of the defendant can successfully defend an application for security for costs;
Security will only be ordered against an impecunious plaintiff; and
The Court is required to at least have regard to the possibility that the proceedings might be stifled.
Viewed against this background, the Court held that Irish security for costs law meets the proportionality test under EU law.
Interestingly, the Court also noted in its closing comments that the backers of an impecunious corporate plaintiff are required, as a result of the security for costs law, to potentially be put in a position to make the same kind of decision that both amply resourced corporate plaintiffs and private individuals have to make when contemplating proceedings: is it worth it? And that is how it should be.