The “Impecunious Claimant” and security for costs

The m/v “VICTOR 1” (the “Vessel”) was owned by Savory Shipping (“Savory”), who bareboat chartered the Vessel to Ceto Shipping (“Ceto”) on an amended Barecon 2001 form.[1]  The charterparty provided for title to the Vessel to pass from Savory to Ceto, if Ceto paid all hire and other sums due under the charterparty and management agreement to another company called Delfi, S.A.,[2] a company associated with Savory.  Whether these amounts were actually paid was disputed by the parties.[3]  Whilst the claimant and defendant were arguing about ownership of the Vessel, she was arrested by the crew for unpaid wages and sold in Singapore.[4]

Both Savory and Ceto agreed that the rightful owner (whichever that was) would be entitled to the balance of the sale proceeds, which were being held by the Singapore court following the in rem proceedings in that jurisdiction.

Ceto sought declaratory relief in the English Commercial Court that it was the lawful owner of the Vessel and therefore the party entitled to the sale proceeds.  Savory counterclaimed, seeking a declaration that it was the rightful owner.[5]

By way of interlocutory proceedings, Savory sought security for costs under CPR 25.12 in respect of Ceto’s claims for damages and declaratory relief.  The grounds relied upon by Savory were Ceto’s inability to pay an adverse costs order if required, and steps taken by Ceto in relation to its assets that would hinder enforcement.  Ceto admitted that it would be unable to pay an adverse costs order.  Ceto resisted the defendant’s application arguing that it was impecunious and an order for security would stifle its genuine claim.  Ceto also argued that the application should be rejected by the court in any event, given that Savory’s counterclaim mirrored Ceto’s claim.[6]

Would an order for security for costs stifle Ceto’s claim?

The English justice system is founded on the philosophy that the interests of justice are normally best served if successful litigants recoup the costs of their litigation, and unsuccessful litigants pay those costs.   However, where the evidence shows that a claimant would be unable to comply with an order for security because of its impecuniosity, the court has to consider whether the effect of such an order would be to stifle a genuine claim.

The merits of a claim are to be disregarded when considering the risk of a claim being stifled.  In other words, it is no defence for Party A,  in response to an allegation of stifling, to argue that Party B’s claim is meritless.  Instead, the test, per the Supreme Court in Goldtrail Travel Limited v Onur Air [2017] UKSC 57, when considering whether a claimant should be required to provide security for costs of an appeal, is:

“Has the [claimant] established on the balance of probabilities that no such funds would be available to it, whether by its owner or by some other closely associated person, as would enable it to satisfy the requested condition?” (emphasis added)

As would be expected, a claimant’s prospects of fundraising (to meet a security for costs order) would be unknown to a defendant.  It is thus the claimant’s burden to demonstrate with “full, frank, clear and unequivocal”[7] evidence that it could not raise the money to pay the security, in which case an order for the same would stifle the claimant’s genuine claim.  The court underlined that the claimant must “show not only that he does not have the money himself, but that he is unable to raise the money from anywhere else”.[8]

Ceto’s owner, an Iranian national (“Ms S”), gave evidence that due to the OFAC sanctions imposed on her, it was impossible for her or Ceto to obtain funding.[9] However, the evidence overall did not support Ceto’s argument that funding was unavailable to it.

To the contrary, it was clear from the multi-jurisdictional litigation that Ceto was, in fact, able to access funding whenever it needed it.  The court identified that Ceto had been involved in a significant amount of litigation in the US and England, including an LMAA arbitration in London against Delfi, S.A.[10] Further, in a spectacular case of bad timing for Ceto, it had just commenced a new action in Singapore just three weeks before the security for costs hearing — which Savory obviously brought to the court’s attention.[11]

Following a review of the evidence, the court damningly stated that “for a claimant who claims to be entirely impecunious to have commenced as many actions as have Ceto is surely unprecedented”.[12]

The court concluded that Ceto’s presentation of the evidence in support of its claim of being impecunious could not be and was not full and frank, leading the court to the conclusion that an order for security for costs would not stifle Ceto’s claim.[13] However, that was not the end of it.

Should orders for security for costs be refused where a counterclaim mirrors the primary claim?

There is a postulate that where a claim and a counterclaim address a dispute arising out of the same factual matrix, it would be unjust to order security for costs.  This is because where a claim and counterclaim arise on the same issues, it may well be a matter of chance which party is the claimant and which is a counterclaim defendant.  This is commonly known as the Crabtree principle.[14] The underlying reasoning is that the dispute would be determined in any event, and where the claimant was not permitted to progress its claim (for a failure to provide security for costs), this would be unfair since the defendant is being permitted to proceed with its counterclaim which mirrors the primary claim.

One option for a defendant to still obtain security for costs where the Crabtree principle applies would be for the defendant to offer a Dumrul undertaking[15].  A Dumrul undertaking is a cross-undertaking via which a defendant consents to its own counterclaim being dismissed where the claimant’s claim is struck out for not putting up security for costs.

In this case, Savory chose not to provide a Dumrul undertaking.[16] In consequence, the court did not grant Savory security for costs against Ceto in respect of Ceto’s claim for declaratory relief regarding the ownership of the Vessel.[17] Based on the Crabtree principle, the court held that it would be contrary to the interests of justice to order security for the declaratory part of Ceto’s claim, since the mirrored counterclaim meant that the same issue would have to be determined in any case.[18]

In other words, if the court ordered security and it was not provided by Ceto, then the claim would be stayed and ultimately struck out.  That would mean that the action would continue involving the counterclaim (in relation to which all of the same factual issues would be decided); however, if decided in favour of Ceto, no relief would be given.  The court stated that the ‘Crabtree’ principle exists to prevent precisely that consequence, which is contrary to the interests of justice.

However, the position was different in respect of the damages claim.  Savory had not filed a (mirror) damages claim.  As such, the Crabtree principle was not engaged and, accordingly, the court did order security for costs in respect of this aspect of Ceto’s claim for damages, failing which the claim would be stayed.[19] As such, the court stated that the sum for security would be much smaller than that claimed overall.[20]

Practical advice for claimants and defendants

In order for claimants to resist security on the basis of impecuniosity, they should be prepared to be full and frank – in other words, to put all of their cards on the table. If a claimant is able to fund litigation, it should be prepared to explain the source of the funding and why that funding is not suddenly available to put up security for costs.

For defendants seeking security for costs, they should conduct an objective analysis of their own counterclaim before investing in a security for costs application. Is the factual matrix the same? Is the relief the parties are claiming the same? Will a defendant fall foul of the Crabtree principle and, if so, is the defendant prepared to offer a Dumrul undertaking in those circumstances? Genuine self-analysis of these issues is likely to save time and costs.

For more information about this – please contact Jody Wood

References;

[1] Ceto Shipping Corporation v Savory Shipping Inc [2023] EWHC 2995 (Comm) [2]; Ceto Shipping Corp v Savory Shipping Inc [2022] EWHC 2636 (Comm).

[2] Ceto Shipping Corp v Savory Shipping Inc [2022] EWHC 2636 (Comm) [5].

[3] Ceto Shipping Corporation v Savory Shipping Inc [2023] EWHC 2995 (Comm) [3]-[4].

[4] Ceto Shipping Corporation v Savory Shipping Inc [2023] EWHC 2995 (Comm) [5].

[5] Ceto Shipping Corporation v Savory Shipping Inc [2023] EWHC 2995 (Comm) [9]-[10].

[6] Ceto Shipping Corporation v Savory Shipping Inc [2023] EWHC 2995 (Comm) [13].

[7] Ceto Shipping Corporation v Savory Shipping Inc [2023] EWHC 2995 (Comm) [21] quoting Al-Koronky v Time Life Entertainment Group Ltd [2005] EWHC 1688 (QB) [31].

[8] Ceto Shipping Corporation v Savory Shipping Inc [2023] EWHC 2995 (Comm) [16].

[9] Ceto Shipping Corporation v Savory Shipping Inc [2023] EWHC 2995 (Comm) [27-29].

[10] Ceto Shipping Corporation v Savory Shipping Inc [2023] EWHC 2995 (Comm) [31-40].

[11] Ceto Shipping Corporation v Savory Shipping Inc [2023] EWHC 2995 (Comm) [38].

[12] Ceto Shipping Corporation v Savory Shipping Inc [2023] EWHC 2995 (Comm) [40].

[13] Ceto Shipping Corporation v Savory Shipping Inc [2023] EWHC 2995 (Comm) [42].

[14] BJ Crabtree v GPT Communication Systems [1990] 59 BLR 43.

[15] Dumrul v Standard Chartered Bank [2010] EWHC 2625 (Comm).

[16] Ceto Shipping Corporation v Savory Shipping Inc [2023] EWHC 2995 (Comm) [50].

[17] Ceto Shipping Corporation v Savory Shipping Inc [2023] EWHC 2995 (Comm) [53].

[18] Ceto Shipping Corporation v Savory Shipping Inc [2023] EWHC 2995 (Comm) [51].

[19] Ceto Shipping Corporation v Savory Shipping Inc [2023] EWHC 2995 (Comm) [53].

[20] Ceto Shipping Corporation v Savory Shipping Inc [2023] EWHC 2995 (Comm) [53].