Under what circumstances can a Defendant approach a court for an order for security for costs?

 

By Dean Brainin, candidate attorney. Supervised by Roy Bregman.

The Rules of the High Court and the Magistrates’ Court allow a Defendant to apply to Court to compel a Plaintiff to provide security for costs, in limited circumstances. The common law and the Close Corporation Act also give a Defendant that limited right.

The rationale is that Plaintiff would be unable to satisfy the costs order if Defendant succeeds with its defence and the Court dismisses the claim against Plaintiff with costs.

Such security for costs can take the form of a bank guarantee, bond or an insurance policy. Defendant has the onus to satisfy a Court that it is appropriate to order Plaintiff to provide security.

A party may only make an application for security of costs once legal proceedings have commenced, and Defendant must bring the application “as soon as practicable after the commencement of proceedings”. The timeframe as to what constitutes “as soon as practicable” is at the Court’s discretion.

In Ecker v Dean 1937 AD 254, the Court confirmed that it had inherent jurisdiction to stop or prevent a vexatious action as an abuse of the process of the Court by ordering the vexations litigant to give security for the costs of the other side.

Over time, the grounds upon which a party could rely to obtain an order for security of costs have become more stringent. In Boost Sports Africa (Pty) Ltd v The South Africa Breweries (Pty) Ltd [2015] ZASCA 93, the Court found that it is not sufficient to demonstrate that a Plaintiff will be unable to satisfy a possible cost order against it. The Court must also be confident that the main action or application is (1) vexatious, (2) reckless, or (3) amounts to an abuse of the process of the Court.

Various Courts have defined the terms “vexatious”, “abuse”, and “frivolous”:

·         “vexatious” as “frivolous, improper: instituted without sufficient ground, to serve solely as an annoyance to the defendant”.

 

·         “an action is vexatious and an abuse of the process of court inter alia if it is obviously unsustainable. This must appear as a certainty, and not merely on a preponderance of probability”.

 

·         An action is vexatious and frivolous, “where on the face of the pleadings it is shown that the action cannot be maintained“.

 

·         “abuse” as “a misuse, and improper use, a use mala fide, a use for an ulterior motive”.

See Fisheries Development Corporation of SA Ltd v Jorgensen and Another; Fisheries Development Corporation of SA Ltd v AWJ Investments (Pty) Ltd and Others 1979(3) SA 1331 (W)); African Farms and Townships Ltd v Cape Town Municipality 1963 (2) SA 555(A) and Golden International Navigation SA v Zeba Maritime 2008 (3) SA 10 (C)  

A court will also consider each case independently based on their facts and surrounding circumstances taking into account the interests of justice. See Haitas & Others v Port Wild Props (Pty) Ltd 2011 (5) SA 562 (GSJ).

Moreover, a court has to consider section 34 of the  Constitution, which provides that everyone has the right to have any legal dispute decided in a fair public hearing. The Court must balance the potential injustice to a Plaintiff if it cannot pursue a legitimate claim due to an order requiring it to pay security for costs, on the one hand, against the potential injustice to a Defendant who successfully defends the claim. See Sherenisa and Others v Minister of Safety and Security and Another (2394/09) [2012] ZAFSHC 30) and Giddey NO v JC Barnard and Partners 2007 (5) SA 525 (C).

Accordingly, it is not enough that a Plaintiff may not be able to satisfy an adverse costs order granted against it. The Court must still be satisfied that the main action or application is (1) vexatious, (2) reckless, or (3) amounts to an abuse of the process of Court whilst considering Section 34 of  the Constitution.

Freedom of testation and our Constitution

 

A will drafted in 1902 created a fideicommissum for three generations. The first generation of heirs included the testator's children, both sons and daughters.  However, the fiduciaries and eventual fideicommissaries were limited to the male descendants in each generation from the second generation. 

In King v De Jager; 2021 (4) SA 1 (CC), the Constitutional Court was called upon to decide whether the exclusion of female grandchildren fell within the definition of freedom of testation or fell foul of section 9 of the Constitution.

After their father died in 2015, female great-grandchildren of the testator went to Court to argue that the terms of the fideicommissum were discriminating based on gender and offended section 9 of the Constitution. This section guarantees equality before the law and freedom from discrimination by private persons.

In our law, a testator can leave his property to anyone he likes. Van den Heever JA stated in Bydawell v Chapman 1953 (3) SA 514 (A) 521E-F: 'Roman-Dutch law recognises as a matter of public interest, transcending the private interests of beneficiaries under a will, that effect should be given to the wishes of a testator … the "interests" of the testator and the public interest demand that effect should be given to a testator's last wishes.'

However, a testamentary provision may not contradict the boni mores / public policy.

The Court reiterated that there is no obligation to bequeath anything to anyone, and testators are free to disinherit any family member. However, the Court found that the condition that upon the death of the last fideicommissaries, the inheritance must go to the male descendants of the testator, was invalid as it discriminated unfairly against the female grandchildren.

Under what circumstances can a Defendant request a Plaintiff Company or Close Corporation to furnish security for costs?

By Dean Brainin (Candidate Attorney) and Roy Bregman.

Section 13 of the Companies Act 61 of 1973 (the old Act) and Section 8 of the Close Corporations Act 69 of 1984 (the CC Act), entitle a Defendant to ask a company or Close Corporation as a Plaintiff in litigation to put up security for costs if there is reason to believe that the Plaintiff will not be able to pay the Defendant's costs if it loses an action or application.

The Companies Act 71 of 2008 (the new Act) replaced the old Act and does not contain a provision that allows a Defendant to ask a Plaintiff to provide security for costs. Under what circumstances can a party approach a court to compel a company to furnish security?

In the case of Boost Sports South Africa (Pty) Ltd v South Africa Breweries (Pty) Limited [2015] 3 All SA 255, the SCA set out the factors that determine if a court should order a Plaintiff incola Company to furnish security for costs, namely, if:

·         There is a basis in law to order an incola plaintiff company to furnish security.

·         Defendant fails to demand security expeditiously.

·         The application commits the Plaintiff under oath to a version before the trial.

·         Plaintiff's claim is vexatious, unmeritorious or amounts to an abuse.

·         Under section 34 of the Constitution, Plaintiff's constitutional right will be infringed unless a Court hears the case in a fair and public hearing.

·         There are material disputes which the parties cannot resolve on the papers and without the benefit of oral evidence.

Our courts have enunciated on these principles. In African Farms & Townships v C.T. Municipality 1963 (2) SA 555 (A) the Court stated: "an action is vexatious and an abuse of the process of Court … if it is obviously unsustainable ". In Golden International Navigation S.A. v Zeba Maritime 2008 (3) S.A. 10 (C) the Court posited that action is vexatious and frivolous, "where on the face of the pleadings it is shown that the action cannot be maintained ".

In the case of Telecommunications (Pty) Ltd v Datagenics (Pty) Ltd 2013 (1) S.A. 65 (GNP), the Court held it must apply the common law where the Companies Act did not contain a provision regulating security for costs. Additionally, the Court cannot order South African companies to furnish security purely based on their financial position.  

Section 8 of the CC Act still applies. In the recent case of Fusion Properties 233 CC v Stellenbosch Municipality (932/2019) [2021] ZASCA 10, the SCA addressed the uncertainty concerning an order for security for costs against a Close Corporation.

In this case, Fusion instituted legal proceedings against the Stellenbosch municipality for damages resulting from an alleged breach of contract for the sum of roughly R32 million. Fusion was a company that had no assets. Because of this, the Municipality made an application for security for costs as it believed it had no prospect of recovering their costs of litigation if they were successful in defending the claim brought by Fusion. The High Court ordered Fusion to furnish security for costs of R2 626 431.06 and further ordered that stay of action until Fusion complied with such order. Fusion contested its obligation to provide security for costs.

Fusion disputed the order to furnish security on three grounds, namely:

·         The Municipality did not call for security for costs "as soon as possible after the commencement of the action". 

·         Section 8 of the CC Act deals with security for costs in legal proceedings by Close Corporations.  Fusion argued that no basis existed for the High Court to order that Fusion put up security, even if Defendant believed that Fusion would be unable to satisfy an adverse costs order. 

·         If they were to furnish security, Fusion would be unable to pursue its claim by being denied access to Court in terms of Section 34 of the Constitution.

The High Court rejected all three grounds upon which Fusion relied. The SCA upheld the finding of the lower Court.  The SCA held that it could not ignore Section 8 because Section 13 of the Companies Act 61 of 1973 - the functional equivalent of Section 8 - was not carried over to the current Companies Act 71 of 2008 when the legislature repealed the old Act.

The Fusion case confirms that a Defendant may ask a Close Corporation to put up security when it has insufficient funds or assets to cover the Defendant's costs if a Court grants an adverse cost order against it. However, the Court still has to be satisfied that the main action or application is (1) vexatious, (2) reckless, or (3) amounts to an abuse of the process of the Court.