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Security for costs – shareholder’s indemnity may not be sufficient

18 Dec 2017

The recent case of Dunn Motor Traction Ltd v National Express Ltd discussed security for costs in litigation – a risky area of litigation which IPs must be aware of.

 

Facts

 

Dunn Motors claimed that National Express had wrongly repudiated a contract between them and claimed damages of £20m in lost profits.  National Express defended on the basis that they were entitled to terminate the contract.

 

As part of the proceedings, National Express applied for security of costs as they did not believe that Dunn Motors would be able to pay their costs should National Express successfully defend the claim.

 

To make such an application, it has to be shown that (1) there is reason to believe that the claimant would be unable to pay the defendant’s costs if order to do so and (2) having regard to all circumstances of the case, it is just to make an order for security of costs.

National Express estimated their costs to be around £1.8m and sought security of £975,000.

 

Decision

 

The judge found that the termination of the contract had a “dramatic effect on the financial health” of Dunn Motors with the turnover in 2016 reducing from £16m to £8m.  Dunn Motors submitted that they would have £1.125m in their bank account to settle any costs order.  The judge found that this was not sufficient as the figure did not make allowance for their own legal costs.

 

The sole shareholder of Dunn Motors also gave an indemnity in respect of the costs liability, arguing that this was similar to having adverse costs insurance in place.  In Premier Motorauctions v PWC, it was held that where there is an ATE policy in place, the question is simply whether there is reason to believe that the insurer will not pay under the policy.  However, the court distinguished between a professional insurance provider and an indemnity from an individual, and held that Mr Dunn’s indemnity was not sufficient security.

 

The judge therefore made an order for security of costs of £487,500 payable within four weeks and £487,500 payable within four months.

 

Comment

 

In order for ATE policies to be sufficient as security they must be “provided by a substantial and reputable insurer”.

 

Parties should take time to understand the obligations that they may be faced with if unsuccessful and that they will be liable not only for their own costs but likely for the other side’s costs too.

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Short Richardson and Forth Solicitors Limited is a private limited company registered in England and Wales under company number 10572065, authorised and regulated by the Solicitors Regulation Authority No 637150.

Short Richardson and Forth Solicitors Limited is a private limited company constituted and run in accordance with the provisions of the Companies Act 2006. The term “partner” has been used to denote individual senior solicitors employed by Short Richardson and Forth Solicitors Limited.