What is security for costs?
Security for costs is a procedural mechanism that may require a claimant, counterclaimant or another party bringing a claim to provide financial security for the legal costs that the opposing party may be entitled to recover if the claim is unsuccessful. The purpose of security for costs is not to decide the merits of the dispute, but to reduce the risk that a successful respondent or defendant will be unable to recover awarded costs.
The mechanism is particularly relevant in cross-border disputes, international arbitration and litigation involving parties with limited assets in the jurisdiction where the proceedings take place. It may also arise where there are concerns about a party’s solvency, asset structure, funding arrangements or conduct in the proceedings. Security may take the form of a bank guarantee, deposit, escrow arrangement, parent company guarantee or another form accepted by the court or arbitral tribunal.
Security for costs is distinct from security for a claim. Security for a claim is aimed at preserving assets or ensuring enforceability of the substantive relief sought, whereas security for costs concerns potential liability for procedural or legal costs. The availability, conditions and scope of security for costs depend on the applicable procedural law, arbitration rules, the seat of arbitration and the discretion of the decision-maker.
What does security for costs involve?
In practice, an application for security for costs usually requires the requesting party to show that there is a real risk that a future costs award will not be satisfied. The relevant factors may include the claimant’s financial position, lack of assets in an enforcement-friendly jurisdiction, corporate structure, insolvency risk, third-party funding, previous non-compliance with procedural orders or steps suggesting that enforcement may be difficult.
In court proceedings, the rules vary significantly between jurisdictions. Some legal systems provide detailed statutory rules, while others treat security for costs as a discretionary case management measure. In Poland, the Code of Civil Procedure contains specific rules under which a claimant residing or having its seat outside Poland may, in defined circumstances, be required to provide security for litigation costs. The application of those rules depends on factors such as the claimant’s place of residence or seat, applicable international agreements, enforceability of judgments and available exemptions. In cross-border cases, European Union law and bilateral or multilateral treaties may also affect whether security can be ordered.
In arbitration, security for costs is commonly considered as a form of interim or provisional measure. Many institutional arbitration rules allow tribunals to order interim measures, although they may not always expressly refer to security for costs. As a result, tribunals often assess such requests by reference to their general procedural powers, the applicable arbitration rules and principles of fairness and proportionality. Different tribunals may apply different thresholds, especially where the request is based on third-party funding or financial difficulties that existed before the dispute began.
A party opposing security for costs may argue that the request is tactical, disproportionate or intended to obstruct access to justice. It may also show that it has sufficient assets, that a costs award would be enforceable, that the respondent’s risk is speculative, or that ordering security would unfairly prevent the claim from being pursued. Courts and tribunals generally seek to balance the respondent’s protection against the claimant’s right to have the dispute heard.
When should security for costs be considered?
Security for costs should be considered at an early stage of a dispute where there are objective concerns about cost recovery. This may be relevant when the claimant is based outside the jurisdiction, operates through a special purpose vehicle, has no visible assets, is undergoing restructuring or insolvency-related difficulties, or is funded by an external funder without clear arrangements for adverse costs.
For businesses, security for costs may be important in commercial litigation, post-transaction disputes, shareholder disputes, construction disputes, debt recovery matters and international arbitration. It can help manage litigation risk where defending a claim requires substantial expenditure and there is a realistic concern that even a successful outcome will not allow recovery of costs.
For claimants, the issue should be assessed before commencing proceedings, especially in cross-border disputes. A claimant that may be exposed to a security application should consider its asset position, litigation budget, available guarantees and the procedural rules applicable to the dispute. Failure to address these issues may lead to delays, additional procedural costs or, in some systems, consequences for the continuation of the claim.
A prompt legal assessment may help avoid procedural mistakes, unnecessary disputes over costs, enforcement difficulties and financial exposure. Early advice is particularly useful where the dispute involves several jurisdictions, an arbitration clause, foreign parties, third-party funding or uncertainty as to the recoverability of legal costs.
Legal support in matters involving security for costs
Support in relation to security for costs may include in particular:
- assessment of whether security for costs is available under the applicable procedural law or arbitration rules,
- preparation of applications for security for costs in litigation or arbitration,
- defence against applications that are disproportionate, premature or unsupported by evidence,
- analysis of enforcement risk, asset location and cross-border recovery of costs,
- advice on appropriate forms of security, including deposits, guarantees and escrow arrangements,
- procedural strategy in international arbitration and cross-border court proceedings,
- coordination of security for costs issues with broader dispute, settlement or enforcement strategy.
Need assistance with security for costs? Contact us.
See also
- Arbitration
- Civil Litigation
- Business dispute
- Debt Recovery