Key points on security for costs

The judgment in Virgo Marine and Anor v Reed Smith LLP delivered by Mr Justice Foxton on 14 May 2025 examines the crucial issue of security for costs within a litigious context involving intricate financial transactions under contractual obligations. This case notably illuminates the principles surrounding security in legal proceedings, especially regarding foreign entities and the ramifications of international sanctions.

The litigants in this case included Claimants Virgo Marine and Nixie Marine Inc., alongside Defendant Reed Smith LLP and a third party, Barclays Bank PLC. The origins of this litigation delve into a Memorandum of Agreement signed on 14 July 2022, which facilitated the sale of an oil tanker. Reed Smith LLP acted as the legal representative for Kibaz Shipping LP, the seller of the vessel, and an escrow agreement was established, involving an initial deposit and subsequent payments managed by Reed Smith and Barclays Bank.

As the court revealed, challenges emerged when Virgo was designated under US Executive Order 13846, raising concerns regarding the impact of international sanctions on transaction processes. This designation sparked communications between Reed Smith and Barclays, where the bank received instructions to block any transactions involving the sanctioned entity.

The litigation's central contention revolves around the Claimants alleging that Reed Smith's legal guidance to Barclays not to process payments constituted breaches of fiduciary duty and contractual obligations. The Claimants maintain they are owed the remaining balance of the purchase price, which Barclays refused to process due to the sanctions.

A primary focus of the judgment was the application for security for costs filed by Reed Smith. The court scrutinised whether there were reasonable grounds to presume that the Claimants would be incapable of meeting a costs order in favour of the Defendant. Mr Justice Foxton highlighted the Claimants were foreign entities incorporated in jurisdictions with limited financial transparency, justifying concerns about their capacity to address potential costs. He clearly stated that the jurisdiction to order security for costs based on perceived insolvency depends on having “reason to believe” the Claimants could not fulfil such financial obligations.

Additionally, the ruling clarified the legal relationship forged between the parties under the escrow agreement, establishing that the escrow funds' holder, Reed Smith as the escrow agent, had a contractual obligation rather than a fiduciary one. This distinction limits the holder's liability and defines their responsibility level concerning the funds.

When assessing potential recovery of costs related to additional claims against Barclays, the court noted that the security requested should cover all anticipated costs, affirming that the security amount sought by Reed Smith must appropriately reflect a reasonable estimate of its own legal costs and those pertaining to any claims against Barclays.

In a decisive conclusion, Mr Justice Foxton denied the application for security for costs, asserting that the evidence did not convincingly demonstrate that permitting the Claimants to proceed without security would compromise the court’s judgment or the integrity of the judicial process. This ruling underscores the delicate balance courts must navigate in litigation, evaluating the rights of corporate entities against the obligations embedded in complex financial agreements and the overarching need for judicial efficiency and fairness.

Ultimately, the judgment in Virgo Marine & Anor v Reed Smith LLP stands as a significant reference concerning security for costs within English legal practice, probing the intersection of contractual obligations in international trade, the effects of sanctions on litigation, and the guiding principles for courts addressing applications for security for costs