Court of Appeal rejects “sliding scale” approach to level of security for costs when real risk of non-enforcement established

The Court of Appeal has allowed an appeal against the High Court’s decision to reduce the amount of security for costs a Russian-resident claimant was ordered to pay by applying a “sliding scale” of risk where the defendants had shown a real risk of non-enforcement of a costs order in Russia: Chernukhin v Danilina [2018] EWCA Civ 1802.

The court confirmed that, once it has been established that there are substantial obstacles sufficient to create a real risk of non-enforcement, the starting point should be that the defendant should have security for the entirety of the costs. There is no room for discounting the security figure by grading the risk using a sliding scale approach. However, the quantum of security is a matter for the judge’s discretion and discretionary factors (such as delay and the risk of stifling a genuine claim) may affect the amount of security ordered.

Maria Clarke, a senior associate in our disputes team, outlines the decision below.

Background

The claimant is a Russian national, resident in Moscow. She brought a claim against three defendants, alleging that she is the beneficial owner of the second defendant.

The defendants issued applications for security for costs, including on the basis that the claimant was resident in a non-Convention state, ie a state which is not covered by the various reciprocal regimes which provide for enforcement of English judgments(CPR 25.13(2)(a)).

The judge at first instance found that there was a real risk of a complete failure of enforcement of a costs order in Russia (a non-Convention state) but that it was not “at the high end of probability”. For that reason she chose to apply a sliding scale to the claimed costs: she extrapolated from the figures claimed (which were up to the date of the CMC) to a total costs figure up to trial and then discounted that total figure to arrive at what she considered to be the appropriate sum for security.

The defendants appealed on various grounds, including that the judge erred in law by concluding that, notwithstanding that there was a real risk of non-enforcement in Russia, the level of security should be reduced by the application of a sliding scale of risk.

Decision

Hamblen LJ, giving the leading judgment of the Court of Appeal, concluded that the judge did err in law by adopting a sliding scale approach. He found that, once a real risk of non-enforcement has been established, as a starting point the defendant should have security for the entirety of the costs and there is no room for discounting the figure by grading the risk using a sliding scale approach. However, the quantum of security is a matter for the judge’s discretion and discretionary factors such as delay or a concern not to stifle the claim may affect the amount of security to be ordered, if any.

In arriving at this conclusion Hamblen LJ considered three Court of Appeal cases relating to CPR 25.13(2)(a): Nasser v United Bank of Kuwait [2002] 1 WLR 1868, De Beer v Kanaar & Co [2003] 1 WLR 38 and Bestfort Developments LLP v Ras Al Khaimah Investment Authority [2016] EWCA Civ 1099. The guidance provided by these authorities could be summarised as follows:

  1. To establish jurisdiction under CPR 25.13(2)(a) the claimant has to be resident (i) out of England and Wales and (ii) in a non-Convention state.
  2. If these conditions are satisfied, the court has a discretion to make an order for security for costs if it is satisfied that it is just to do so.
  3. The court has to ensure that its discretion is being exercised in a non-discriminatory manner for the purposes of Articles 6 and 14 of the ECHR.
  4. This requires objectively justified grounds relating to obstacles to or the burden of enforcement in relation to a particular foreign claimant or country.
  5. Such grounds exist where there is a real risk of substantial obstacles to enforcement or of an additional burden in terms of costs or delay.
  6. The order for security should be tailored to cater for the relevant risk.
  7. Where the risk is of non-enforcement, security should usually be ordered by reference to the entire costs of the proceedings.
  8. Where the risk is limited to additional costs or delay, security should usually be ordered by reference to that extra burden of enforcement.

In Bestfort, the Court of Appeal held that the appropriate “threshold” test when considering whether there are substantial obstacles to enforcement is whether there is a “real risk” rather than a “likelihood” of risk. Various reasons are given for reaching that conclusion, including becauseĀ  issues that will be considered at an interlocutory hearing on the basis of limited evidence require a simple and clear approach. Introducing a sliding scale approach would require the defendant to establish likelihood of non-enforcement (if not more) if security for the entirety of the costs was to be obtained. Further, it would lead to the type of detailed evidentiary exercise the court was keen to avoid in Bestfort.

The Court of Appeal therefore allowed the appeal and remitted the matter to the trial judge to quantify the security.

Given the court’s decision on this ground, it did not consider any other grounds of appeal. However Hamblen LJ commented, obiter, that the well-established approach in relation to security for costs applications is that parties should not attempt to go into the merits of the case unless it can be clearly demonstrated that there is a high degree of probability of success or failure. Hamblen LJ commented that the note at 25.13.1 of the 2018 White Book which states that “in considering an application for security for costs against a claimant, the court must take into account the claimant’s prospect of success…” is inconsistent with this well-established approach and should not be followed.

Maria Clarke
Maria Clarke
Senior associate
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