Dunn Motor Traction Ltd v National Express Ltd

Factual and Procedural Background

This opinion concerns an application by the Defendant against the Claimant for security for costs in relation to a dispute arising from the premature termination in June 2015 of a contract between the Claimant and the Defendant. The contract involved the provision of coach services by the Claimant in return for monthly payments from the Defendant. The Claimant alleges wrongful repudiation by the Defendant and claims damages of approximately £20 million for lost profits. The Defendant contends it was entitled to terminate the contract under its terms. The claim was scheduled for a 12-day trial starting 22 January 2018, with judgment anticipated in late February or early March 2018. The Defendant seeks security for costs estimated at £975,000, part of an overall cost estimate of about £1.8 million.

Legal Issues Presented

1. Whether there is reason to believe that the Claimant will be unable to pay the Defendant's costs if ordered to do so.
2. Whether, having regard to all circumstances, it is just to make an order for security for costs.
3. Whether an indemnity given by the sole shareholder of the Claimant company should be treated as a reliable source of litigation funding analogous to After The Event ("ATE") insurance for the purposes of security for costs.

Arguments of the Parties

Defendant's Arguments

• The Defendant must be granted security for costs because the Claimant is likely unable to pay the Defendant’s costs when they fall due in April 2018.
• The Claimant’s financial position deteriorated significantly following contract termination, with turnover halving and a net loss recorded in 2016.
• The indemnity from the Claimant’s sole shareholder is not a reliable source of litigation funding and should not prevent security being ordered.
• The Defendant estimates its costs at approximately £1.8 million, with an interim payment likely around £750,000 to £1 million due shortly after judgment.
• It is just to order security despite any impact on the Claimant’s business or shareholder’s expansion plans.

Claimant's Arguments

• The Claimant concedes there is reason to believe it will be unable to pay the Defendant's costs in April 2018 but argues the relevant date for assessment should be April 2019, by which time the Claimant expects to have sufficient funds.
• The Claimant relies on an irrevocable indemnity given by its sole shareholder to cover the costs liability, submitting this should be treated similarly to ATE insurance and considered a reliable source of funding.
• The shareholder’s indemnity should negate the reason to believe the Claimant will be unable to pay costs.
• Ordering security would be unjust given the severe downturn caused by the Defendant’s termination of the contract and the impact on the Claimant’s business and shareholder’s expansion plans.
• The shareholder intends to support the Claimant’s legal costs through related companies, evidencing ability to meet liabilities.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Premier Motorauctions v PWC [2016] EWHC 2610 (Ch)	ATE insurance is a reliable source of litigation funding; the court must consider whether there is reason to believe the insurer will not pay when called upon.	The court accepted the principle but distinguished shareholder indemnities from ATE policies, holding the latter are more reliable.
Geophysical Service Centre v Dowell Schlumberger [2013] EWHC 147 (TCC)	Recognition that ATE policies are central to access to justice and generally reliable for security for costs applications.	The court relied on this as marking a turning point in treatment of ATE policies but found it inapplicable to shareholder indemnities.
Longstaff International v Baker & McKenzie [2004] 1 WLR 2917	Undertakings by related companies or shareholders may not be reliable if there is hostility or conflict of interest.	Applied to distinguish the shareholder indemnity as less reliable than an insurer’s guarantee, noting potential hostility and lack of enforceability.
In re Unisoft Group (No.2) [1993] BCLC 532	Relevant time for assessing ability to pay costs is when payment falls due.	Confirmed that the court must consider ability to pay at the time costs become payable, supporting the April 2018 assessment date.
Holyoake and another v Candy and others [2016] 6 Costs LR 1157	It is generally just to order security for costs once the threshold condition is met.	Supported the court’s conclusion that ordering security was just in the present case.

Court's Reasoning and Analysis

The court first identified the threshold condition under CPR 25.13: whether there is reason to believe the Claimant will be unable to pay the Defendant's costs if ordered, and whether it is just to order security. The Claimant’s financial evidence showed a significant downturn post-contract termination, with projections indicating insufficient funds to pay costs by April 2018. The Claimant’s argument to assess ability to pay at a later date (April 2019) was rejected due to lack of supporting evidence, optimistic projections, and failure to account for the Claimant’s own legal costs.

The court then considered whether the indemnity from the sole shareholder should be treated like an ATE insurance policy. Although ATE policies are regarded as reliable litigation funding, the court distinguished shareholder indemnities as less reliable because the shareholder is effectively an adversary to the Defendant and may have conflicting interests. The court noted the risk the shareholder might delay or resist payment, and the absence of a direct contractual obligation to the Defendant.

Applying precedent, the court found that shareholder indemnities do not negate the threshold condition unless in exceptional cases. The present case was not exceptional, given the shareholder’s business interests and potential motivations to delay payment. The court accepted that the shareholder might prefer to invest resources in business opportunities rather than promptly satisfy the indemnity.

Having found the threshold condition satisfied, the court considered whether it was just to order security. The court rejected arguments that the severe downturn or potential business impact made ordering security unjust, noting that the court cannot assess the merits of the underlying claim at this stage. The court concluded it was just to order security.

Regarding the timing and staging of the security payment, the court accepted a staged order reflecting the Defendant’s incurring of costs, ordering half the sum to be paid within four weeks and the remainder within four months.

Holding and Implications

The court granted the Defendant's application for security for costs.

The order requires the Claimant to provide security of £975,000, with £487,500 payable within four weeks and the remaining £487,500 payable within four months. The court’s decision reflects the principle that security for costs is appropriate where there is reason to believe the Claimant cannot pay and it is just to do so, and that shareholder indemnities do not generally provide the same reliability as ATE insurance for this purpose.

The ruling directly affects the parties by imposing a financial security requirement on the Claimant, but does not establish new precedent beyond reaffirming existing principles concerning shareholder indemnities and security for costs.