Security for costs and off-shore companies

By Philip Barnes, Senior Associate, Fenwick Elliott

There has been much press comment recently about the nature of “offshore companies” and in particular those incorporated in the British Virgin Islands which has only limited requirements for provision of any company information.  While for UK domiciled companies historic information on their financial position is publicly available from their accounts filed at Companies House, the same is not true of companies incorporated in the British Virgin Islands.

The opaque nature of the financial position of one BVI company came before the English Court of Appeal in the case of Sarpd Oil International Limited v Addax Energy SA and Another [2016] EWCA Civ 120.

This case concerned an appeal about security for costs in an international purchase contract.  Sarpd Oil International Limited (“Sarpd”) had bought a quantity of gas oil from Addax Energy SA (“Addax”).  Sarpd alleged that the gas oil did not meet the specification so claimed damages from Addax.  There was a dispute as to the precise terms of the contract and there was also an argument that samples of the gas oil taken would be final and conclusive of the quality of the goods shipped.  Neither of these substantive arguments concerned the Court of Appeal.  Addax themselves had purchased the goods from Glencore Energy UK Limited (“Glencore”) so if there was a problem with the gas oil they were going to pass the claim down the contractual chain and on to Glencore.

In English law — unlike many other jurisdictions — the usual rule is that the loser pays the winner’s costs, so the winner takes it all.  If you choose to sue a “man of straw” who cannot pay your costs at the end of the day that is your problem.  But what if you are sued by a worthless entity?  Should you have to expend considerable sums of money defending yourself against what may be a weak claim and yet have no confidence that your opponent will pay your costs if you win?

Addax were faced with a claim from Sarpd and were facing not only their own costs of fighting Sarpd but, if they passed the claim down to Glencore and lost it, they would have to pay Glencore’s costs as well.  Their possible cost risk was high.  Addax considered Sarpd’s financial standing and clearly did not like what they saw — and they could see precious little of Sarpd.  Therefore, on Sarpd bringing the case, Addax had applied for “security for costs”.  This is a mechanism where the court can require a claimant to pay money into court before it is permitted to continue with its claim.

The costs which Addax were facing were composed of three items:

1. Addax’s own defence costs fighting Sarpd;
2. Addax’s costs of passing the claim on to Glencore; and
3. Glencore’s costs which Addax would have to pay if Addax lost (and which would inevitably follow if Addax won their case against Sarpd).

There are limited circumstances in which a court will consider ordering security for costs, and these are governed by Rule 25 of the Civil Procedure Rules.  These state that the court may make an order if it is satisfied that it is just to do so and either statute permits it or one of the specified conditions apply.

The only specified condition on which Addax relied was that:

“The claimant is a company or other body (whether incorporated inside or outside Great Britain) and there is reason to believe that it will be unable to pay the defendant’s costs if ordered to do so;”

The wording therefore indicates that there needs to be a reason to believe that the claimant will not be able to pay the defendant’s costs if ordered to do so.  What would be the situation if there was no evidence about the claimant’s financial standing one way or another?  The defendant would not be able to point to any previous company accounts, or indeed any publicly available evidence of the financial status of this BVI company because none were available.  Solicitors for Addax had asked for information from Sarpd’s solicitors, but there was marked reticence to give substantive replies.

In the first instance the Judge held that there was no reason to believe that Sarpd would be unable to pay Addax’s costs if ordered to do so.  The lack of any financial information was therefore in Sarpd’s favour.  If you had no information at all then you could not reasonably believe that Sarpd could not pay if ultimately they were ordered to do so.

The Judge commented that the reluctance of Sarpd to provide any financial information was entirely understandable.  It would be in a stronger negotiating position if it came to doing a deal with Addax to settle the litigation.  After all, the thinking would go, better to have something now rather than nothing later.

The Judge also commented on what was said to be the unwritten practice in the Commercial Court might be to order security for costs where a company had not filed publicly available accounts, had no discernible assets and declined to reveal its financial position.  If that was the practice then it was not justified and he would not follow it. Accordingly the Judge at first instance did not order Sarpd to pay security for costs.  Addax would have to carry on regardless.

Addax appealed.

The Court of Appeal had to decide the following issues:

1. Was it correct for the Judge not to follow what was thought to be the usual practise of the Commercial Court by declining to order security for costs when the claimant had no publicly available accounts, no discernible assets and had offered no comfort as to its financial position?
    
2. If that was wrong, and security for costs should be ordered, then should those costs include:
   
   2.1  Addax’s costs of suing Glencore; and
   
   2.2  Glencore’s costs which Addax would have to pay if Glencore won against Addax (and Addax had won against Sarpd).

The Court of Appeal emphasised that all that was needed was a reason to believe that the claimant would not be able to pay the costs, if ordered.  The first instance Judge was “plainly wrong”.

If a company is given every opportunity to show that it can pay the defendant’s costs if it loses, and deliberately does not do so, then that in itself gives every reason to believe that it will not be able to pay the defendant’s costs if ordered to do so. 

The Court of Appeal was unimpressed by the Judge’s view that the uncertainty about Sarpd’s financial position was an acceptable risk in commercial negotiations.  It pointed out that this would mean that Sarpd were representing to the Court that there was no reason to suppose that they would be unable to pay costs if ordered, whilst maintaining exactly the reverse position in negotiations with Addax.  That, the Court had no hesitation in finding, was illogical and unacceptable.

An alternative argument that Sarpd might want to keep matters confidential for business reasons was dismissed equally swiftly.  There had been no application for the Court to sit in private, or to avoid referring to sensitive financial figures in public.

The Court of Appeal considered whether there was any obligation on a party to “fill in the gaps in the evidence” by virtue of their obligation to further the “overriding objective” of civil litigation under English law which is to deal with cases justly and at proportional cost.

The Court concluded that where there is no evidence at all about the financial standing from the only party who can provide it then that in itself is evidence which a court can take into account.  If there was a Commercial Court practice that ordered security for costs against a foreign company that was not obliged to publish accounts, had no discernible assets and revealed nothing about its financial situation, then that practice should be upheld.

The Court of Appeal therefore upheld the first ground of appeal, and reversed the Judge’s order.  Security for costs had to be given.

The next issue was, what should be included in those costs?

Should Glencore’s likely costs “down the line” be added?  Sarpd said that Glencore’s costs were not Addax’s costs, so they should not be included in the security ordered.  The Court pointed out that at the time security was ordered the Court was contemplating the situation at the end of the trial when costs would be ordered.  Here, if Sarpd lost against Addax, Addax would lose against Glencore.  Glencore would recover their costs from Addax and those would then become Addax’s costs.  Also, as Glencore would not be able to have security for their costs against Sarpd but only (if ever) against Addax, Addax must be able to pass that burden on to Sarpd.  In addition, Addax should have security for their own costs of suing Sarpd.

The end result was that the Court of Appeal overturned the order of the lower court and held that:

1. Security for costs should be ordered;
    
2. Security should include:
   
   2.1  the Defendant’s own costs of defending; and
   
   2.2  the Defendant’s own costs of pursuing Glencore, the third party; and
   
   2.3  the third party’s (Glencore’s) costs as Addax would have to pay them if Sarpd lost.

How much were Sarpd ordered to pay as security for costs?  The figure was £868,254.42, is an interesting (if one-off) comparison with the article on arbitration costs also to be found in this edition of IQ.

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