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Security for Costs – Confirming the Financial Position

Companies are placed in a very difficult situation when they're faced with having to defend a claim that they feel is opportunistic - when the other party loses they have incurred legal fees and learn that the other party isn't able to pay them. Security for costs plays the important role of protecting against this, provided strict rules are met.


The recent case of Sarpd Oil International Ltd v Addax Energy SA & ANR [2016] involved a dispute over an oil purchase agreement whereby one party made an application for security of costs. The Court of Appeal in this case was able to rectify the prior ruling that had stringently refused to allow security for costs.

What Happened in This Case?

Sarpd, an African oil corporation, alleged that gas oil they had purchased from oil producer Addax wasn't up to scratch and hadn't met the contractual specifications.

Sarpd wished to claim for damages or an indemnity from Addax, and a case was to commence over whether Addax had met the specifications.

Addax – who needed to defend the claim against them – applied for security for costs due to doubts over Sarpd's financial security and their ability to meet legal costs should Addax win the case.

It was found that Addax had made a number of requests for confirmation that Sarpd's finances were secure, and Andrew Smith J did say in the initial case that Sarpd had been deliberately reticent in disclosing their financial security.

Despite these concerns, the judge still held "there was no reason to believe that Sarpd would be unable to pay Addax's costs if ordered to do so" and refused to allow security for costs.

The Ruling Was "Plainly Wrong"

On appeal, it was found that this decision was wrong. The Court of Appeal clarified that, if financial security can't be shown, then there is sufficient cause for concern that could amount to the need to allow an application for security for costs.

Lord Justice Sales delivered his reasoning:

"We consider, with all due respect to the judge, that he was plainly wrong. If a company is given every opportunity to show that it can pay a defendant's costs and deliberately refuses to do so, there is, in our view, every reason to believe that, if and when it is required to pay a defendant's costs, it will be unable to do so."

Confirming the Other Side's Financial Position

SM commercial comments:

"This judgment has importantly clarified that, provided the other conditions for security for costs are met, the financial position of parties can also be confirmed."

"If you are faced with defending a claim, it's important to seek professional legal help from the experts in this field. This gives you the peace of mind that you're fully informed and that relevant protections are in place throughout the entire process."

Simpson Millar's Commercial Law team specialise in commercial litigation and are adept at handling complex disputes professionally and efficiently. We will work to fully understand the nature of your business and your objectives; and will tenaciously pursue this on your behalf.

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Dated: 16/03/2016

Author: Greg Cox

Landlord - Residential Letting Contract

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