This month in SARPD Oil International Ltd v Addax Energy SA and another [2016] EWCA Civ 120, the Court of Appeal gave a judgment clarifying the appropriate test on security for costs under CPR 25.13(2)(c). This decision is particularly important for defendants who are facing claims brought by a non-EU or EFTA company.

Under CPR 25.13(2)(c), a defendant may seek security for its legal costs for defending an action brought in an English court from a claimant company resident outside the EU and EFTA, where ‘there is reason to believe that it will be unable to pay the defendant’s costs if ordered to do so’. This security is ordinarily in the form of a bank guarantee but can also be a payment into court.

It was held that to pass this test, the court must simply have reason to believe that the claimant will not be able to pay the defendant’s costs. If the claimant is given an opportunity to show that it can pay the defendant’s cost but remains silent on this point, it cannot resist a defendant’s request under CPR 25. This is important forcompanies that may seek the tax benefits and limited transparency of an offshore registration.

The decision also touched on the issue of costs budgets. The Court of Appeal held that there is “little if any difference between the practical effect of the court’s order in relation to incurred costs and its order in relation to estimated costs”. This means that when the court makes a costs management order approving a costs budget, it not only approves the estimated costs, but can also rule on the incurred costs to the effect that they are reasonable and proportionate. Some commentators have held that this means that where a court comments on incurred costs set out in a costs budget, it is effectively assessing those costs. In addition, pursuant to this judgment, it was further held that where a costs budget has been recorded in a costs management order, when assessing the costs on a standard basis, the court will not depart from that order unless it finds there is good reason to do so.

The decision particularly affects defendants who may wish to persuade the court to allow less on assessment of costs as, for many parties who have agreed a costs budget, they will find that they have also agreed the incurred costs as well as estimated costs, which the court will not depart from unless it has been provided with a good reason. It would be advisable that if parties wish to take issue with the other side’s cost budget then they should do so at the first Case Management Conference.

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