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Applicable test for ordering of security for costs
PRACTICE AREA GROUP: Commercial Litigation and Dispute Resolution
Although an award of costs is at the discretion of the court,(1) the general underlying principle is that costs should follow the event, such that the successful party should be awarded its costs against the unsuccessful party.(2) However, an award of costs may, in practical terms, be of little or no value if the unsuccessful party is impecunious. Since a defendant has little or no control over whether proceedings issue against it, in order to shield defendants from spurious litigation and irrecoverable costs awards against impecunious plaintiffs, a defendant can seek security for its costs as against the plaintiff. A recent case(3) considered the test applicable to the ordering of security for costs.
The defendant was a quarry supplier of concrete, stone, sand, gravel and related products. The plaintiff claimed that the defendant had acted negligently and was in breach of contract in supplying stone, which allegedly contained pyrite and was allegedly used in a development undertaken by the plaintiff. The plaintiff sought an indemnity and damages from the defendant arising from alleged pyrite-induced damage.
The defendant brought an application seeking security for its costs as against the plaintiff. Although there is a general jurisdiction to grant security for costs in the relevant court rules, the application for security for costs against the plaintiff company was founded on Section 390 of the Companies Act 1963, which provides that:
"where a limited company is plaintiff in any action or other legal proceedings, 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."
The court noted that the central elements in such an application for security for costs are for the applicant (the defendant) to show that it has a prima facie defence to the plaintiff's claim and to satisfy the court that the plaintiff would be unable to pay the defendant's costs in the event that the defendant succeeded at trial. If the defendant can meet these requirements, security for costs will usually be granted, absent special circumstances.
In this case, the court observed that the plaintiff openly admitted that it would be unable to meet the defendant's costs if the defendant succeeded at trial. Accordingly, the question to be determined as part of the application was whether the defendant could show it had a prima facie defence to the plaintiff's claim. Although the defendant had put forward extensive affidavits and exhibits in support of its denial of liability, the court found the plaintiff's affidavit evidence to be "impressive" in that it "meticulously deals with the various aspects as set out on the defendant's behalf and the basis on which they are disputed on the plaintiff's behalf".
In considering the applicable test, the court noted that it had been considered extensively in Tribune Newspapers (in receivership) v Associated Newspapers Ireland,(4) where a review of previous authorities resulted in the following conclusion:
"...both the Supreme and High Courts have used slightly different terminology to describe the nature of the defence which must be established on an application for security for costs. Whilst there is generic use of prima facie defence there is it appears also references, apparently in the alternative, to good defence, real defence or even to the plaintiff's case as being required to be unanswerable, with the consequential impact on the defendant's defence. What appears from the judgments, in a manner similar to the judgments in relation to summary judgement [cases], is that a defendant seeking to establish a prima facie defence which is based on fact must objectively demonstrate the existence of evidence upon which he will rely to establish these facts. Mere assertion will not suffice. This appears to me also to follow from the reference in the Superior Court Rules to a defence on the merits. If such evidence is adduced then the defendant is entitled to have the court determine whether or not it has established a prima facie defence upon an assumption that such evidence will be accepted at trial. Further, the defendant must establish an arguable legal basis for the inferences or conclusions which it submits the court may arrive at based upon such evidence… in my judgment, what is required for a defendant seeking to establish a prima facie defence is to 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. I propose applying this test. Further, it appears to me that such a test is supported by s. 390 as enacted by the Oireachtas [Parliament], which I am applying in this application for security for costs. The section as enacted contains no express reference to the establishment of a prima facie defence. The application of the prima facie defence test is applicable for the purposes of this section, in the sense that the section requires the company to provide security where it would be unable to pay the costs of the defendant if successful in its defence. It is therefore relevant to consider that, or whether or not, a defendant has a prima facie defence in the sense that he might succeed but [this jurisdiction] does not warrant the imposition of a higher threshold. Unless the defendant has a prima facie defence the purpose of this section would not come into play."(5)
The court expressed its agreement with this statement of the law. In doing so, it found the evidence put forward by the plaintiff to be more compelling than that of the defendant. In particular, it observed that the content of the defendant's affidavits were matters of assertion and, in order to set out a prima facie defence the defendant should have carried out an inspection of the properties with the relevant necessary experts to give credence to the assertions. On that basis, the court found that the defendant had not objectively demonstrated the evidence on which it would rely to establish a prima facie defence. Accordingly, the second essential proof required for an order for security for costs had not been met and the motion was refused.
The decision represents a useful restatement of the requirement that in an application for security for costs the defendant must show that it has a prima facie defence to the claim advanced against it. The objective of protecting a defendant from incurring irrecoverable costs arising from unmeritorious claims could not be met if a threshold of a prima facie defence were not required as part of the test, as recognised in Tribune Newspapers. Accordingly, in considering an application for security for costs, a defendant applicant should think carefully about how it will demonstrate that it has a prima facie defence, particularly by reference to the evidence.
For further information please contact Gearoid Carey at Matheson by telephone (+353 1 232 2000), fax (+353 1 232 3333) or email firstname.lastname@example.org.
(1) Order 99, Rule 1(1), Rules of the Superior Courts.
(2) Order 99, Rule 1(4), Rules of the Superior Courts.
(3) Marchbury Properties Ltd v Murphy Concrete Limited  IEHC 525.
(4) Unreported, High Court, March 25 2011.
This article first appeared in ILO magazine in January 2014.