Court of Appeal awards security for costs against Russian national

Out-Law News | 15 Aug 2018 | 11:31 am | 4 min. read

The Court of Appeal has ordered a Russian national to provide full security for the legal costs of a former business partner.

Its judgment overturns that of the High Court, which had applied a discount to the security to be provided by Lolita Danilina, reflecting what it said was the low risk that any costs order against Danilina would not be enforced in her native Russia. The Court of Appeal ruled that the 'sliding scale' approach adopted by the High Court judge was "inappropriate", as the legal test required an applicant for security to demonstrate no more than a "real risk" of non-enforcement.

The case will now return to the High Court, which will be required to reconsider the appropriate level of security based on the expected total cost of the proceedings.

"This decision will no doubt be welcome to other defendants who are concerned that any costs orders which they obtain will be unenforceable overseas," said asset recovery expert Andrew Barns-Graham of Pinsent Masons, the law firm behind Out-Law.com. "Essentially, it reaffirms that applicants who are able to demonstrate a 'real' no enforcement risk are normally entitled to security for the entirety of their estimated costs of the proceedings, without any discount being applied based on the precise extent of that risk."

However, legal costs expert Keith Levene of Pinsent Masons said that it "remains to be seen" what approach the judge would ultimately take following the Court of Appeal's judgment.

"This is an interesting decision on a point of principle – however, it still leaves it open to the judge to decide up to what point in the proceedings security should be provided and the quantum of that security, albeit that the defendants would have the ability to return to the court if and when further security was required," he said.

Danilina has sued her former business partner, Vladimir Chernukhin, with whom she was also in a relationship, in the English courts. Chernukhin is also a Russian national, but has lived in England since 2004. Danilina is pursuing two separate claims in the English courts: one, against Chernukhin, a company and another individual; and another against Chernukhin only.

Chernukhin and the other parties applied for security for costs against Danilina, as she is resident in a state to which the Brussels Regulation and Lugano Convention on jurisdiction and enforcement of judgments do not apply (non-Convention state). Their applications included evidence from Russian lawyers relating to the potential difficulties the applicants could face enforcing any order of the English court in Russia.

The Civil Procedure Rules (CPRs) set out the judge's discretion to grant security for costs, and the conditions that must be satisfied. Previous cases have established that the rules must be applied in a way which does not unlawfully discriminate against the residents of non-Convention states, and that the applicant must demonstrate a real risk of substantial obstacles to enforcing the order in that jurisdiction.

In this case, the first instance judge concluded that although there was a real risk of "a complete failure of enforcement" in this case, this was not "at the high end of probability". For this reason, she applied a 'sliding scale' to the costs claimed, to reflect what she said were the risks of non-enforcement. The Court of Appeal ruled that this approach was incorrect. It ruled that the graded approach adopted by the High Court was "wrong in principle", and would also open the court up to "the type of detailed evidentiary exercise" which it had already attempted to crack down on through the case law.

"In principle, security should be tailored so as to provide protection against the relevant risk," said Lord Justice Hamblen, giving the judgment of the court.

"On the judge's findings the relevant risk is that of non-enforcement of any costs order obtained. The purpose of ordering security in such circumstances is to secure the defendant against the risk of non-recovery of those costs. Since that is the risk against which the applicant is entitled to protection, I agree with the appellants that the starting point should be that the defendant is entitled to security for the entirety of his costs," he said.

"[T]he court's approach should be consistent. If … it is not appropriate to require that more than a real risk be established for the purpose of non-discrimination, it is equally inappropriate to do so for the purpose of quantum. The consequence of adopting a sliding approach is in effect to require the defendant to establish likelihood of non-enforcement (if not more) if security for the entirety of the costs is to be obtained," he said.

Asset recovery expert Andrew Barns-Graham noted that the principles outlined in the case law, and reaffirmed in this case, represented the "general" rule.

"The court can still exercise its discretion to reduce the quantum of security in certain other circumstances, for example where there is evidence of undue delay on the applicant's part or evidence that an order for security in the full amount would stifle the claimant's ability to pursue the claim," he said.

"The decision should also be viewed in its wider context. One of the reasons why the Court of Appeal preferred the simple test to the introduction of a more complicated 'sliding scale' approach was that the latter would increase the volume and complexity of the evidence being adduced at security for costs hearings. The decision therefore represents the latest in a long line of cases where the English courts have tried to limit the scope, complexity and cost of interlocutory applications. This is an important trend in English civil proceedings which all litigants should be mindful of, as it can have a substantial impact on the preparation of applications and on case strategy more generally," he said.

Barns-Graham noted that the implications of the decision went further than just those cases where the claimant was resident outside of the EU, or in a non-Convention state. The court's power to make security for costs orders also extends, for example, to "cases where the claimant is an impecunious corporation, or has changed address with a view to evading the consequences of litigation", he said.

"The courts have, however, stated on several occasions that security for costs applications should normally be made at an early stage of proceedings," he said. "Obtaining early legal advice on this issue is therefore essential, for claimants and defendants alike."