Factual and Procedural Background
This opinion concerns an application by the Defendant for security for costs under CPR 25.13(1)(a) and (2)(a) and/or (c), seeking an order for security in the amount of 500,000 or such other sum as the Court deems appropriate. The Defendant is a Scottish company engaged in hydrocarbon exploration, while the Claimant is a Hong Kong registered company primarily involved in import, export, and marketing activities. The dispute arose following a joint bid by both parties for oil exploration rights in the Caspian Sea within Turkmenistan, which was unsuccessful and led to the Claimant’s claims against the Defendant. The Claimant’s initial claim for repayment of US$550,000 was later amended to exceed US$121 million in damages. The Defendant’s application for security for costs was opposed by the Claimant.
Legal Issues Presented
- Whether the Claimant is resident within or outside the jurisdiction for the purposes of CPR 25.13(2)(a).
- Whether there is reason to believe that the Claimant will be unable to pay the Defendant's costs if ordered to do so, pursuant to CPR 25.13(2)(c).
- The exercise of the Court’s discretion in ordering security for costs, particularly in light of the principles established in Nasser v United Bank of Kuwait concerning discrimination and enforcement burdens.
- The appropriate quantum of security for costs, taking into account the extra burden of enforcement outside the jurisdiction.
Arguments of the Parties
Defendant's Arguments
- The Claimant is resident outside the jurisdiction, specifically in Hong Kong.
- The Claimant is likely unable to pay the Defendant’s costs if ordered to do so, supported by financial analysis including audited accounts and concerns over asset valuation.
- There are likely to be substantial obstacles and extra burdens, including costs and delay, in enforcing any costs order against the Claimant abroad, justifying security for costs.
- The quantum of security should reflect the estimated costs of the action and the additional burden of enforcement in Hong Kong and potentially other jurisdictions.
Claimant's Arguments
- The Claimant is resident within the jurisdiction (England), not outside it.
- There is no evidence that the Claimant will be unable to pay the Defendant’s costs if ordered to do so.
- Financial evidence, including audited accounts and management accounts, supports the Claimant’s ability to pay; the Defendant’s accounting evidence is incomplete or unreliable.
- Relying on Nasser v United Bank of Kuwait, the Court should either refuse security for costs or limit it to a minimal amount reflecting only the extra burden of enforcement.
- The location of the Claimant’s assets should not be a factor in deciding the security application, as it would be discriminatory.
Table of Precedents Cited
| Precedent |
Rule or Principle Cited For |
Application by the Court |
| Nasser v United Bank of Kuwait [2001] EWCA Civ 556; [2002] 1 WLR 1868 |
Limits on ordering security for costs to avoid discrimination based on residence; discretion must be exercised considering enforcement burdens abroad. |
The Court applied Nasser to ensure no discrimination against foreign claimants and to tailor security orders to the realistic extra burden of enforcement abroad rather than the full costs claimed. |
| In re Little Olympian Ltd [1995] 1 WLR 560 |
Definition of "resident" for security for costs: based on central management and control and location of real business. |
The Court used this precedent to determine that the Claimant was resident in Hong Kong, thus satisfying the threshold condition for ordering security for costs. |
| Re Unisoft Group Ltd (No.2) [1993] BCLC 532 |
Test for inability to pay costs: the Claimant "will be unable" to pay, not merely "might be unable". |
The Court applied this stricter test and found that the Defendant did not meet the burden of proof that the Claimant will be unable to pay costs. |
| Thune [1990] 1 WLR 562 |
Impecuniosity as a factor in ordering security for costs, especially for companies. |
Referenced in relation to the relevance of the Claimant’s financial position and its impact on enforcement burdens. |
| Hammond Suddard v Agrichem [2001] EWCA Civ 2065 (unreported) |
Discretionary exercise of security for costs and quantum of security. |
The Court considered this case but rejected the submission that it limited the application of Nasser regarding quantum of security. |
| Aims Asset Management v Kazakhstan Investment Fund (unreported, 22 May 2002) |
Relevance of the location of claimant’s assets in assessing enforcement risk. |
The Court agreed that the location of assets is relevant and not discriminatory when considering enforcement difficulties. |
| Somerset-Leeke v Kay Trustees [2003] EWHC 1243 (Ch) |
Argument that location of assets should not affect security order. |
The Court did not accept this argument and found that asset location is relevant to enforcement risk. |
Court's Reasoning and Analysis
The Court first addressed the residence issue, applying the test from In re Little Olympian Ltd, focusing on the location of the Claimant’s central management and control. The Claimant was incorporated, had its principal office, and prepared accounts in Hong Kong, and had not paid corporation tax in England, supporting the conclusion that it was resident outside the jurisdiction in Hong Kong. This satisfied the threshold condition of CPR 25.13(2)(a).
Next, the Court considered whether the Defendant had shown that the Claimant "will be unable" to pay the Defendant’s costs under CPR 25.13(2)(c), applying the stricter test from Re Unisoft Group Ltd (No.2). The Defendant relied on financial evidence highlighting uncertainties in the valuation of a major asset (Crotex interest) and the Claimant’s trading losses. However, the Court found the evidence insufficient to conclude that the Claimant will be unable to pay, noting that the audited accounts showed receivables likely to be available to satisfy costs and that management accounts did not undermine this picture. Thus, the Defendant failed to satisfy the burden under sub-rule (c).
Turning to discretion, the Court acknowledged that the power to order security for costs is discretionary and must not discriminate against foreign claimants, as established in Nasser. The Court carefully analysed the rationale in Nasser, emphasizing that residence alone cannot justify security for costs absent objective grounds related to enforcement burdens. The Court rejected the Claimant’s argument that the location of assets is irrelevant, agreeing with authorities that enforcement risks depend on where assets are located.
The Court found a realistic risk of a substantial extra burden in enforcing a costs order in Hong Kong compared to enforcement within the jurisdiction or Brussels/Lugano states, including potential resistance to enforcement and associated costs and delay. The Claimant’s financial position, while not conclusively showing inability to pay, contributed to this risk. The Court also recognized a low but real risk that enforcement might need to extend beyond Hong Kong, further increasing costs and delay.
Regarding quantum, the Court assessed the Defendant’s estimated costs at around 400,000 and considered evidence that additional enforcement costs in Hong Kong would be approximately 50,000 after discounting costs that would be incurred within the jurisdiction. An additional 50,000 was allowed to guard against the risk of more complex enforcement abroad. The Court declined to add any sum for delay.
Holding and Implications
The Court ORDERED that the Claimant provide security for the Defendant’s costs of the action in the amount of 100,000.
The decision reflects a careful balancing of the legal principles governing security for costs, particularly the need to avoid discrimination against foreign claimants while protecting defendants from the realistic risks and burdens of enforcing costs orders abroad. The Court’s ruling imposes a security requirement tailored to the extra burden of enforcement in Hong Kong and possible other jurisdictions, rather than the full amount of the Defendant’s costs. No new precedent was established beyond the application of existing principles, and the order’s direct effect is to require the Claimant to provide security for costs to the Defendant in the specified amount.