The recovery, or not, of pre-action costs in an application for security for costs just got a little easier to work out, say Chris Warren-Smith and Ian Pegram

In adding up the costs incurred in defending a claim in preparation for an application for security for costs, can a defendant include costs incurred prior to proceedings starting, including pre-action mediation costs? Helpfully, the High Court has recently given guidance in Lobster Group Ltd v Heidelberg Graphic Equipment Ltd & Anor (2008).

The court may make an order for security for costs using its discretion under part 25 of the Civil Procedure Rules (CPR) where it is satisfied, having regard to all the circumstances of the case, that it is just to make an order and where one or more of the conditions in CPR 25.12(b) applies, or an enactment permits the court to require security. One condition of CPR 25.12(b), for example, is where the claimant is a company or other body (whether incorporated inside or outside Great Britain) and there is reason to believe it will be unable to pay the defendant’s costs if ordered to pay them.

The court must then use its discretion to determine the amount of security and the manner and time within which security should be given.

Security for pre-action costs

In deciding on the amount of security, the court must examine the extent to which the costs sought by the subject of the order are recoverable as falling within section 51 of the Supreme Court Act 1981, which provides that the court may award 'the costs of and incidental to the proceedings'.

In Lobster Group the court confirmed that pre-action costs falling within the parameters of section 51 are recoverable (following the decision in McGlinn v Waltham Contractors [2005]). As a matter of principle, therefore, costs incurred prior to the commencement of proceedings may be the subject of an application for security for costs.

However, in Lobster Group the pre-action period ran from an unsuccessful pre-action mediation in 2005 to the commencement of proceedings in late 2007. The court considered that to award security for costs covering such a long period would be inappropriate and ‘unnecessarily draconian’.

In more general terms, the court held that, where there is considerable delay and costs are large, such as in Lobster Group, the court should be slow to exercise its discretion to allow the applicant to obtain security for pre-action costs. The court held that awarding security in respect of those costs could amount to a penalty. Furthermore, where there was a greater period between the incurring of costs and the start of proceedings, the losing party is more likely to be in a position to dispute any liability for such costs when they are assessed.

Security for costs of pre-action mediation

In Lobster Group the applicant sought to include within the amount of security costs arising in relation to a pre-action mediation in 2005. These costs made up a large proportion of the pre-action costs.

The court held that these costs did not fall within section 51 as ‘costs of and incidental to proceedings’. Mr Justice Coulson determined that ‘on the contrary, it seems to me clear that they are not. They are the costs incurred in pursuing a valid method of alternative dispute resolution’. He concluded that ‘as a matter of general principle... I do not believe that costs incurred in respect of such a procedure are recoverable’.

Notably, in this case the parties had agreed, as part of the CEDR-governed mediation, that each would bear its own costs. By extension, the court held, it would not then be appropriate to allow one of the parties to recover costs by way of security for costs which, three years earlier, it had expressly agreed to bear. Also, the fact that the mediation and the reasons for its outcome were privileged were important factors in determining that the costs were not recoverable.

Helpfully, the court provided certain examples of circumstances in which pre-action mediation costs may be the subject of security for costs. For example, cases where an expert report was prepared for use in mediation and was later used in subsequent proceedings. However, despite any agreement to share mediation costs, the parties would also have to agree that those specific costs could be the subject of a subsequent application.

The costs incurred in the mediation were distinguished, in the court's view, from the costs of complying with a pre-action protocol.

Security for costs of mediation following commencement of ­proceedings

While pre-action mediation costs will not generally be recoverable, Mr Justice Coulson distinguished two authorities which provide that the costs of mediation taking place after the commencement of proceedings are recoverable and could be included in an application for security for costs.

In Chantrey Vellacott v The Convergence Group (2007) and NatWest Bank v Feeney (2006), the High Court held that the costs of post-action mediations were recoverable. In each case the costs fell within section 51 and/or Costs Practice Direction 4.6(8), which permits inclusion in a bill of costs ‘work done in connection with negotiations with a view to settlement’.

The court in Lobster Group held that it was much clearer that the post-action mediation costs fell within section 51 or the costs practice direction than a mediation which took place over two years prior to the commencement of proceedings.

It is notable that in Chantrey Vellacott, in contrast to Lobster Group, the parties agreed to lift privilege over the mediation, allowing the judge to consider the circumstances of the mediation and whether it was just to allow the recovery of costs associated with it.

Future applications

Practitioners can take comfort from the fact that, as a matter of principle, pre-action costs may be included in an application for security for costs. The potentially onerous amount of security which the claimant has to find may sharpen the focus on their claim, and prove a valuable negotiating tool for defendants.

However, applicants must be aware that it is unlikely that the costs of pre-action mediation will be included in the amount of security, particularly those taking place long before proceedings are commenced. That said, given the pressures to use ADR it remains to be seen whether a court might allow pre-action mediation costs incurred close to the ­commencement of proceedings, where costs are not borne by the ­parties and where privilege is lifted.

In light of Lobster Group, when negotiating the terms of a pre-action mediation, parties would be well served to consider the likelihood of any subsequent security for costs applications prior to agreeing that costs are to be borne by the parties. In any case, defendants can take comfort from the fact that mediation costs incurred after proceedings commence may be included as security.

Chris Warren-Smith is a partner at Fulbright & Jaworski and co-chair of the firm's global litigation practice. Ian Pegram is a ­professional support lawyer in the disputes practice at the firm.

Cases cited

  • McGlinn v Waltham Contractors [2005] EWHC 1419 (TCC)
  • NatWest Bank v Feeney [2006] EWHC 90066
  • Chantrey Vellacott v The Convergence Group [2007] EWHC 1774
  • Lobster Group Ltd v Heidelberg Graphic Equipment Ltd & Anor [2008] EWHC 413 (TCC)