Background

Following established English practice and procedure, litigation in the Cayman Islands operates on a “loser pay” basis, i.e. the loser pays the winner’s costs. There is, however, no assurance provided to the plaintiff that the losing defendant will be able to pay the plaintiff’s costs. The plaintiff in deciding to commence proceedings accepts the risk that the defendant may be unable to satisfy any judgment for costs awarded in his favour.

The defendant to an action, by contrast, has no choice or control over the plaintiff who elects to commence proceedings against him, much less the merits of the plaintiff’s case or the means of the plaintiff, if unsuccessful, to satisfy an award of costs in favour of the defendant. As a result historically the English courts have exercised a discretion to offer a measure of protection to a defendant by requiring the plaintiff in certain circumstances to provide security for payment of the defendant’s costs, i.e. in the event the defendant is ultimately successful in the action and the plaintiff is liable for his costs.

Grand Court Rules 1995, Order 23

The discretionary power of the Cayman Grand Court to require a plaintiff to provide security for the defendant’s costs is found in Order 23 of the Cayman Grand Court Rules 1995 governing civil procedure in the Cayman Islands. Order 23 is drawn directly from and is a modified version of Order 23 of the former Supreme Court Practice of England and Wales.

Order 23 permits a defendant in an action or proceeding, or a party in the position of defendant (e.g. a plaintiff defending a counterclaim), to apply to the Grand Court in certain circumstances for an order that the plaintiff provide security for the defendant’s costs of the action or proceeding. Order 23/1(1) enumerates the circumstances in which a defendant may make an application for security for costs:

  • that the plaintiff is ordinarily resident outside the jurisdiction – the plaintiff may be deemed to be non-resident if he does not have either the right to reside permanently in the Cayman Islands or the right to work in the Cayman Islands;
  • that the plaintiff is a nominal plaintiff who is suing for the benefit of someone else and there is reason to believe the plaintiff will be unable to pay the costs of the defendant if ordered to do so;
  • that the plaintiff’s address is not stated in the writ or originating process or is incorrectly stated; or
  • that the plaintiff has changed his address with a view to evading the consequences of the litigation.

The most common ground for applications for security for costs is that the plaintiff is resident outside the jurisdiction (the “foreign plaintiff”), with the necessary implication that the plaintiff has no assets within the jurisdiction to which the defendant may look to recover his costs if successful. Accordingly the foreign plaintiff, whether a corporation or an individual, upon commencing proceedings in the Cayman Islands is typically subject to an application by the Cayman defendant or defendants for security for their costs, frequently as a tactical strategy to test the plaintiff’s resolve and as a disincentive to foreign plaintiffs of limited financial resources.

Time for the application

While an application for security for costs under Order 23 may be made at any stage in the proceedings, case law indicates that the defendant should make his application promptly following commencement of proceedings, and the Court may look unfavourably upon applications made late in the proceedings.

The discretion of the Grand Court in ordering security for costs

The defendant who is the subject of proceedings by a foreign plaintiff or who otherwise brings himself within one of the enumerated grounds set out above for bringing an application for security for costs does not, however, have a prima facie entitlement or right to an order that the plaintiff provide security for his costs. The jurisdiction of the Court to order the plaintiff to provide security for costs is entirely discretionary and the Court may order security for costs only if “having regard to all the circumstances of the case” it considers it “just to do so.”

As a result, the Court in considering an Order 23 application for security for costs by a defendant is required to engage in a balancing exercise, weighing a number of factors in determining whether in the circumstances it is “just” to order the plaintiff to provide security for costs. These factors include principally, (i) the merits of the case, i.e. whether it can be demonstrated one way or another that there is a high probability of success or failure, and (ii) whether the application for security for costs is being used oppressively i.e. in an effort to stifle a meritorious claim.

The fact that the plaintiff may be impecunious is not a circumstance which the Court will consider directly in determining whether to order that a foreign plaintiff provide security for costs, although it may be relevant where the application is based on the ground that the plaintiff is merely a nominal plaintiff. The plaintiff may be able in some cases to rebut this allegation by demonstrating that his impecuniosity has resulted from the defendant’s actions.

Foreign plaintiff with assets within the jurisdiction

Where the foreign plaintiff has substantial property of a fixed or permanent nature within the Cayman Islands (e.g. real estate), provided that property is available to satisfy any costs award and subject to concerns as to its liquidity, the Court in its discretion may not require security for costs. In most cases, however, given the ease with which property may be encumbered or disposed of, the Court may require that the costs be effectively secured by means of a charge or inhibition on title to the property pending judgment in the matter.

Security for costs under s.74 of the Companies Law (2020 Revision)

Separately from the circumstances under Order 23/1(1) referenced above, there has historically been jurisdiction in the courts under the English company law statutes to require limited companies which are plaintiffs in proceedings, to provide security for the costs of the defendant, where the court is satisfied that if the defendant is successful in its defence, the company’s assets will be insufficient to pay the defendant’s costs. The intention of this provision is to protect defendants from the adverse costs consequences of litigation commenced by plaintiff corporations which may be mere “shell” companies or otherwise unable to satisfy any order for costs made against them.

This provision is reflected in s.74 of the Companies Law (2020 Revision) and implemented by Order 23/3 of the Grand Court Rules, which recognizes that the Court may be empowered by other Laws (i.e. the Companies Law) to require security for the costs of any proceeding.

As a result, where a Cayman limited company is plaintiff in a proceeding, it may be subject to an application by the defendant for security for his costs under s.74 of the Companies Law, where the defendant is able to establish on credible evidence that the plaintiff company will be unable to pay the defendant’s costs. In considering an application under s.74 of the Companies Law, the Grand Court exercises the same discretion as it does under Order 23, and will consider factors including, the merits of the proceedings, whether the application for security is being used oppressively and whether the plaintiff’s impecuniosity has been brought about by the defendant’s actions.

Amount and form of security

In determining the amount of security to be provided by a plaintiff, whether under Order 23/1 or s.74 of the Companies Law, the Court will generally be guided by an estimate or draft bill of costs provided by the defendant, representing his anticipated taxed (assessed) costs of the action through to judgment. While generally costs will be awarded on a dollar for dollar basis, there is considerable discretion in the Court having regard to all the circumstances of the case and the fact that these are projected costs.

Given the difficulty inherent in anticipating developments including interlocutory proceedings, in a typical commercial matter the Court may direct that the security for costs be provided in a staged form e.g. a sum assessed covering the period through to the completion of discovery of documents, and with a further application then to be made by the defendant for security for his costs through to trial.

Security may take a variety of forms, again in the discretion of the court and subject to the circumstances of the case including typically monies deposited with the Court or held in an attorney’s or third party’s trust account, a letter of credit from a local bank, or an inhibition or charge upon title to real estate within the Islands. The principal concern is that the assets/security be readily accessible and available to the defendant if he is successful in his defence and is awarded his costs of the action.

Default in providing security

The typical order for security for costs will impose a time deadline by which the plaintiff must provide the security ordered and in the interim will impose a stay of proceedings in the action by the plaintiff until those costs are paid. Should the plaintiff fail to comply with the costs order within the time frame provided, the defendant is typically entitled to apply to the court for an “unless” order, providing that unless the plaintiff pays the costs by a further fixed date, then the action be dismissed.

Result at trial

It follows that if the plaintiff is successful against the defendant at trial in the usual course, the monies provided by way of security for the defendant’s costs will be returned to the plaintiff by order of the Court. Conversely if the defendant is successful at trial and awarded his costs, the monies held as security for costs will be applied towards the defendant’s costs and any surplus returned to the plaintiff.

Summary

Depending on the circumstances, security for costs may represent a substantial financial hurdle for the foreign plaintiff, or the impecunious Cayman plaintiff company, embarking on litigation in the Cayman Islands. As a tactical matter, proceedings by foreign plaintiffs unprepared or unwilling to make a substantial financial commitment to litigation frequently stall and are dismissed following a strategic security for costs application by the Cayman defendant. The potential exposure to a security for costs application by the defendant and the possible quantum of the security for costs award, is a matter that should therefore be considered and addressed before commencing litigation.

The principal consideration in most cases will be the merits of the plaintiff’s case; where the plaintiff has a demonstrably solid or unanswerable case, the likelihood of a security for costs order is considerably reduced. Conversely in a protracted commercial matter, where the court is unable to safely draw any conclusions as to the merits of the plaintiff’s case, the likelihood of a substantial award of security in favour of the defendant, is considerably greater.

In any case involving a foreign plaintiff, or a Cayman-based plaintiff company of limited substance/resources, legal advice sought should consider the issue of security for costs.

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The foregoing discussion and analysis is for general information purposes only and not intended to be relied upon for legal advice in any specific or individual situation.

If you would like further information on costs in litigation in the Cayman Islands, please contact Paul Keeble of Hampson and Company, Apollo House East, Fourth Floor, 87 Mary Street, George Town, P.O. Box 698 Grand Cayman KY1-1107 Cayman Islands

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