South Africa: South African SCA Reiterates Balancing Exercise Principle In Security For Costs Orders

The issue of whether a High Court correctly exercised its discretion in ordering a foreign applicant to provide security for costs was recently considered by the South African Supreme Court of Appeal ("SCA").

In Mystic River Investments 45 (Pty) Ltd and another v Zayeed Paruk Incorporated and others, the respondents requested security for costs from the foreign applicant, arguing that they feared that the applicant would not pay if they were successful and awarded costs.

Mystic River and Mr Karim Issa Mawji, as its sole director, instituted an application against five respondents, alleging that they were misappropriating from Mystic River.

Because Mr Mawji is domiciled outside South Africa and does not have property in the country, the second to fifth respondents instituted an application in terms of rule 47(1) of the Uniform Rules of Court against Mr Mawji requiring him to provide security for costs.

The High Court ordered Mr Mawji to provide security for costs in an amount fixed by the registrar. In addition, Mr Mawji and Mystic River were ordered to pay for the application for security of costs, including wasted costs of the opposed hearing on 14 May 2021.

Upon appeal, the primary issue before the SCA was whether the High Court had exercised its discretion correctly when ordering Mr Mawji to provide security for costs.

The legal position regarding security for costs

Security for costs is a remedy that a court may grant, at its discretion, to a defendant/respondent where there is a reasonable likelihood that the applicant will not be able to pay the costs of the litigation if they are unsuccessful in their claim. The court exercises this discretion after considering the circumstances of the case and if it is equitable and fair to both parties. A person who resides or is domiciled in South Africa is not entitled to insist that a foreign applicant provide security for costs, in the absence of a court exercising its discretion in favour of ordering the foreigner to furnish security for costs.

In Shepstone & Wylie & Others v Geyser NO , Hefer JA explained the applicable test. Hefer JA confirmed that each case must be decided based on its facts and "there must be no predisposition in favour or against granting the order".

The court must conduct a balancing exercise by weighing the injustices that the plaintiff will suffer if the order of security for costs prevents them from pursuing their claim, against the injustices that the defendant may suffer if the applicant's claim is unsuccessful and an order of costs is made against the plaintiff, but the defendant cannot recover the costs.

SCA's power to interfere with the High Court's exercise of its discretion

The Constitutional Court in Giddey NO v JC Barnard & Partners settled the issue concerning the classification of a discretion to order security for costs. It was held that the appellant court may only overturn the order of the court of first instance where the court considered irrelevant factors and based its findings on wrong legal principles.

SCA's interference with the High Court's order

The High Court adopted a predisposition that a foreigner must provide security for costs when demanded by a party in South Africa. However, this conclusion flies in the face of the decision in Shepstone & Wylie and thus the High Court applied the wrong principle.

The High Court also misread Blastrite (Pty) Ltd v Genpaco Ltd; In re: Genpaco Ltd v Blastrite (Pty) Ltd . The High Court erroneously stated that Blastrite affirms the general rule that requires a foreign applicant to provide security for costs. In fact, in the Blastrite case, it was held that a court exercises its discretion when ordering security for costs and they have to take into consideration the circumstances of each case, and fairness and equity for both parties. In other words, the starting point is not that a foreigner has to provide security for costs.

The SCA further held that "there was no justification for the principle that a court should exercise its discretion in favour of a peregrinus only sparingly". Therefore, the High Court was incorrect to hold that there is a general rule that requires a foreign applicant to provide security for costs. In light of this error, the SCA concluded that it was justified to interfere with the High Court's order.

Applying the principle

Mr Mawji argued that it is "unreasonable and unnecessary" to require him to provide security for costs when Mystic River is a South African entity and has the means to pay the costs if there is an order of costs awarded against them. He also argued that the main application was for the benefit of Mystic River and thus the court should order Mystic River (ie, the local corporate entity) to provide security if such an order was necessary. Lastly, he asserted that his involvement in the case does not create more costs for the respondents than they would have incurred if Mystic River was a sole litigant (and as a local entity, it cannot be ordered to provide security for costs). Furthermore, Mr Mawji asserted that the respondents may recover costs from him in the United Kingdom or Portugal, which indicates that he can afford to pay the cost.

The SCA held that this would inconvenience the respondents and they will also incur additional expenses of trying to enforce a cost order abroad. As such, when applying the balancing exercise required in the Shepstone & Wylie case, the SCA considered that the order to provide security will not cause any injustice to Mr Mawji since he did not plead poverty, and the security will thus not prevent him from proceeding with his main application. On the other hand, if there is no order of security for costs, the respondents would suffer "inconvenience, delay, and additional costs involved in enforcing an order in a foreign jurisdiction".

Accordingly, the SCA held that it was fair and equitable for Mr Mawji to furnish security for costs since he instituted the application in his personal capacity. Moreover, if the funds were to be returned to the Mystic River (ie, if the application by Mr Mawji succeeded), he would be able to claim his 50% share of the profit. In addition, if this matter was indeed for the sole benefit of Mystic River, then Mr Mawji could have withdrawn from the matter to defeat this application for security of costs.

The SCA also held that the High Court erred in ordering that Mr Mawji and Mystic River must jointly furnish costs of the application for the security of costs. The SCA was of the view that Mr Mawji should have been ordered to pay these costs rather than Mystic River (although it was a co-appellant). Consequently, Mr Mawji's appeal was dismissed with costs

This decision once again reiterates the principle in South African law that courts are required to conduct a balancing exercise by weighing the injustices that the applicant will suffer if the order of security for costs prevents them from pursuing their claim, against the injustices that the defendant may suffer if the plaintiff's claim is unsuccessful, and an order of costs is ordered against the applicant, but the defendant cannot recover the costs. Furthermore, the court's decision must be informed by considerations of fairness and equity to both parties.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.