Civil Litigation Explained: What You Need to Know about Security for Costs

The possibility that a Court may, in appropriate cases, order Plaintiffs to pay sums into Court (which may be significant) as security for costs is important for parties to be aware of.

It is important for foreign Plaintiffs who need to understand that this may be an additional upfront cost of the litigation that they must bear if they are ordered to pay such security (even if ultimately recoverable if they win). It is also important for Defendants to ensure that they have means of recovering their costs if they ultimately prevail without being forced to try to enforce a judgment or costs award against a Plaintiff overseas (which may involve significant obstacles), as well as potentially a tactical means of resisting the litigation and putting pressure on a Plaintiff by forcing him to incur such additional upfront costs.

Today, we answer some of the questions frequently asked about security for costs.

Q1. What is an order for security for costs?

In short, Security for Costs allows a Defendant seeking to defend a claim, to apply for security in the form of a deposit from the Plaintiff. It is well-established in Hong Kong that a ‘foreign’ plaintiff may be ordered to deposit a sum in court, when commencing legal proceedings; given that the Plaintiff compels the Defendant to defend the claim, the Defendant ultimately incur costs in doing so.

If the Plaintiff is a foreign company, the Defendant will often be entitled to security for those costs, so that they will not be left out of pocket if the claim instigated by the Plaintiff fails, although the fact that a Plaintiff is a foreign person or entity is not the only factor taken into account by the Court when determining whether or not to order payment of security for costs. Applications for security for costs are a common feature of civil litigation before the first-instance courts in Hong Kong.

A Defendant can make an application for security for costs at any stage of the proceedings, although whilst delay is not per se a bar, it is relevant consideration to the exercise of the Court’s discretion. Order 23 rule 1(1) of the Rules of the High Court provides that the Court may, “having regard to all the circumstances of the case“, order the Plaintiff to give such security for the Defendant’s costs as it thinks just.

Q2. How does it protect the Defendant within litigation proceedings?

The security for costs aims to cover part of the Defendant’s anticipated litigation costs in defending an action brought by a foreign plaintiff. If the Defendant successfully defends the action, the amount of its legal costs that normally would be payable by the foreign Plaintiff, would be secured by the security for costs. Therefore, depending on the amounts involved, and the merits of the case, this can act as a deterrent for overseas Plaintiffs as they may not want to have a significant financial sum locked up in Hong Kong.

Other methods of security include an undertaking to pay, a bond, a bank guarantee or a charge. In Dunham-Bush Industry Sdn Bhd (and others) v Kln Container Line Ltd [2015], the Court considered that the Plaintiff’s solicitors’ letter of undertaking was an acceptable form of security.

Q3. What key elements and essential factors would be considered by the Courts when ordering security for costs?

As noted above, the Court’s power to order payment of security for costs is discretionary. A Plaintiff’s prospect of success will be considered – for example, the more likely the Plaintiff is to succeed in the action, the less likely it is that the Court will order security to be given. Consideration will also be taken on whether the Defendant has an arguable defence to the Plaintiff’s claim, and whether an order for security (if granted) would stifle the Plaintiff’s claim. However, the strength of a Plaintiff’s case is only a material consideration in simple cases – the Court will not make a detailed examination of the merits of the case and it is not the function of the Court to make a “preliminary run” at deciding the ultimate success or failure of the claim.

Any delay in making the application will also be taken into account. Although in most cases delay is not a decisive factor, it may be treated as important, especially where it has led the Plaintiff to act to his detriment or may cause him hardship in the future conduct of the action.

The Plaintiff’s impecuniosity may also be considered by the Court. It is not enough for the Plaintiff to simply assert that he is not in a position to provide security. Generally, the Plaintiff needs to provide the court with reasonably detailed information as to his resources, and to show not only that he is unable to meet any order for security from his own resources, but also that he is unable to raise the funds from other sources, whether through commercial borrowing, or from other backers.

It must be noted that no factor is considered in isolation and none is conclusive, rather the Court in exercising its discretion will take into account the cumulative effect of the various factors stated above to ascertain whether to make an order for security of costs.

Q4. What are the grounds for an application?

There are several grounds for an application for security of costs. This would include where:-

1. The Plaintiff is ordinarily resident outside of the jurisdiction;
2. The Plaintiff is a nominal Plaintiff (a plaintiff or defendant who has no real interest in the result of the suit) suing for the benefit of another and there is reason to believe that the Plaintiff does not have the means to pay;
3. The Plaintiff’s address is incorrectly or not stated in the writ, unless the Plaintiff satisfies the court that the failure to do so or the misstatement was innocent and without any intention to deceive; or
4. The Plaintiff has changed addresses during the proceedings with an intention to evade the consequences of the litigation.

Q5. What grounds can be relied on to oppose an application?

A major matter for consideration is the likelihood of the Plaintiff succeeding. If the Plaintiff’s case is genuine and strong, security should not granted.  On the other hand, an order for security will usually be granted if the Plaintiff cannot clearly demonstrate that it has a high degree of probability of success at trial.

The Court will also take into account whether an order for payment of security will stifle a genuine claim.  Where the Plaintiff makes such an assertion, he must be candid about his financial resources as he has the burden of adducing credible evidence that it is at least more likely than not that funds are not available from any source to provide or support security.

If a Defendant’s counterclaim arises out of the same matters as a Plaintiff’s claim, the Court will not generally order security against a Plaintiff where to do so would effectively be tantamount to providing security to the Defendant for the prosecution of its counterclaim.  Further, if the claim and counterclaim raise essentially the same issues which will have to be fully litigated anyway, the Court is likely to find it unjust to order the Plaintiff to pay security for costs. Where, however, the counterclaim is merely a set-off, the Court will be more likely to assist the Defendant as he is simply defending the claim and is not taking the offensive.

The Court can also take into account the ease of enforcement of a judgment in exercising its discretion on an application for security for costs.  If the Plaintiff is resident in a jurisdiction which has a common law system similar to that in Hong Kong, and there is an arrangement for the reciprocal enforcement of judgments between that jurisdiction and Hong Kong (such as e.g. between Hong Kong and Singapore) more evidence about the difficulties in enforcing a judgment may be required.

As noted above, if the Defendant has delayed in making the application, this may militate against an order for security for costs being made, particularly where it has led the Plaintiff to act to his detriment or may cause him hardship in the future conduct of the action.

Q6. How is the amount of security for costs decided and awarded?

The amount of security for costs are considered by the Court in a case-by case basis. To assist the Court in considering quantum of security, it is the applicant’s duty to provide documents to the Court, usually in the form of a statement of costs or bill of costs. It can be argued that a failure to do so can result in no order as to security for costs being made, even though the applicant had successfully established a right to the same.

In Sunny Securities Investment Limited v Benelux Manufacturing Limited [2013], unusually, the court was also willing to order that the security for costs should cover the period up to and including the trial, in view of (a) the plaintiff’s delay in progressing the proceedings and (b) the defendant’s need to resolve the liquidation proceedings quickly. This was in contrary from the usual practice of requiring the security to cover costs up to an earlier stage of the proceedings, such as the completion of discovery or exchange of witness statements.

The amount of security for costs demanded should not be “wholly excessive” and must be proportionate.

Q7. Is the amount allocated in one single amount or in stages?

This is considered on a case-by-case basis by the Court. Security for costs may be allocated in one single amount, but often is awarded up to a specified stage of the proceedings with liberty to apply for further security. As stated above, a payment into court was a common method by which to give security, but it was not the only method.

Q8. What are the consequences if such amount cannot be paid by the Plaintiff?

An order for payment of security will usually provide that the proceedings be stayed until the security is provided, in many cases providing for the action to be dismissed without further order if security is not given within the time specified – meaning that failure to pay the security ordered will generally mean that the Plaintiff will have to abandon their claim, even though they may have a meritorious claim.

In summary, an order requiring a Plaintiff to pay security may result in the Plaintiff having to bear significant upfront costs even if ultimately such costs will be returned if they win, as a condition for proceeding with his claim.  Plaintiffs should be advised of this possibility at the outset, while Defendants should consider whether an application for security is appropriate to safeguard their interests in recovery of their costs as well as, potentially, tactical considerations.