This is an appeal brought with the permission of the judge against an order of Christopher Clarke J made on 18 October 2005 in which he dismissed an application for security for costs by the defendant.

The judge dismissed the application because of an agreement between the solicitors for the parties under which the claimant agreed to provide security for the defendant's costs in the sum of £30,000. The issue in this appeal is whether the judge erred in principle in dismissing the application.

We heard oral argument yesterday. At the conclusion of the argument we announced our decision that the appeal would be allowed, and said that we would make the following order:

The appeal be allowed and paragraphs 1 and 2 of the order made by Christopher Clarke J on 18 October 2005 be set aside.

The claimant give further security for the defendant's costs of the claim up to and including the hearing beginning on 12 December 2005 in the sum of £120,000 by paying the sum of £120,000 into the Court Funds Office by 4.30 pm on 1 December 2005 or otherwise to the satisfaction of the court.

Unless security is given as ordered

the claim is struck out without further order; and

on production by the defendant of evidence of default, there be judgment for the defendant without further order with the costs of the claim to be the subject a detailed assessment.

The claimant do pay the costs of the application for security for costs before Christopher Clarke J and of this appeal.

The costs of the application before Christopher Clarke J are summarily assessed at £15,460.60 and the costs of this appeal are summarily assessed at £14,104.79.

The claimant to pay those costs to the defendant on or before 1 December 2005.

I can summarise the proceedings and the events which led to them from the judge's judgment. Like the judge I shall call the claimant "the Republic" and the defendant "Istil". Istil is a steel trader whose predecessor in 1995 bought steel from SJC Karaganda Metallurgical Combine ("Karmet"), a Kazak state enterprise, which owned a very large steel mill in Kazakhstan. Karmet was or became in great financial difficulty. The Republic, which owned Karmet, insisted on Istil's predecessor, Metalsrussia Corp Limited, of the British Virgin Islands ("BVI Metalsrussia"), making advanced delivery of raw materials to the value of steel to be delivered to Istil.

Proceedings were commenced by BVI Metalsrussia in the Commercial Court in Paris against the Republic in respect of a number of contracts for the purchase of steel from factories belonging to the Republic. The Republic contested jurisdiction on the ground that it was not a party to those contracts but that if it was then there was a binding LCIA Arbitration Clause and that, alternatively, it was entitled to sovereign immunity. BVI Metalsrussia contended that there was no claim against the Republic under the contracts themselves, together with their arbitration clauses, but only under separate undertakings given during the proceedings relating to the insolvency of Karmet. The Commercial Court in Paris, and subsequently the Court of Appeal, rejected the contention that the Republic was party to any arbitration agreement, but declined jurisdiction on the grounds of sovereign immunity.

BVI Metalsrussia then commenced LCIA arbitration proceedings under three contracts for the sale of rolled steel, dated 1994 and 1995, seeking to recover the advance payments that had been made and damages. The first contract was expressed to be between an entity named Kazakhstan Sauda as sellers and Metalsrussia Corp as buyers. The second and third contracts were between Oltex Trading Corporation as sellers and Metalsrussia Corp as buyers. The Republic contested the jurisdiction of the arbitrators. In the course of the arbitration it appears that BVI Metalsrussia had merged with its parent company which in turn had merged with Istil, the claimant. By a final award of 1 June 2004 in the sum of $6 million the arbitrators found that Karmet was, as principal of the named parties, the seller and that it had made no delivery under two of the contracts and short delivery under the third.

At issue in the arbitration were, first, whether BVI Metalsrussia were the buyers, or whether the true buyers were a Metalsrussia company which became known as HK (for Hong Kong) Metalsrussia; and, secondly, whether the Republic had become a party to the contracts and the arbitration clauses therein as successor to Karmet by virtue of certain provisions of the agreement by which the Republic had sold the mill to a company in the Mittal Group. On both of those issues Istil succeeded. The Tribunal also held that Istil had succeeded to BVI Metalsrussia's claims as a result of the two mergers.

On 13 July 2004 the Republic issued applications in the Commercial Court in London under sections 67 and 68 of the Arbitration Act 1996 ("the 1996 Act"). The application under section 67 contends that the Arbitration Tribunal lacked substantial jurisdiction on the grounds that neither Istil nor the Republic was a party to the arbitration agreements contained in the contracts in respect of which Istil was claiming in the arbitration; secondly, that Istil is bound by the decision of the Paris Commercial Court to the effect that it was not bound by those agreements; and, thirdly, that it repudiated any arbitration agreement by its contentions made before the Paris Commercial Court and the Paris Court of Appeal. The application under section 68 contends that there were serious irregularities affecting the arbitration and the award on the ground that the arbitration tribunal failed to give the Republic an adequate opportunity to deal with one particular allegation and that the tribunal, having held that the question of limitation was to be determined as a matter of Kazak law, wrongly applied French or Belgian law to the question of whether the limitation period had been interrupted.

On the same day as the applications were issued (13 July 2004) the solicitors for the Republic, Richards Butler, advised Penningtons, the solicitors for Istil, of the issue of proceedings. On 15 July Penningtons told Richards Butler by fax that they had instructions to accept service and suggested that the Republic should provide security for costs in the sum of £10,000 for any application for leave to appeal which they thought to be necessary, and £40,000 in respect of the appeal. In fact, contrary to what Penningtons thought, the Republic was not seeking leave to appeal against the award, but relief under sections 67 and 68 of the 1996 Act as I have described.

On 22 July Richards Butler enclosed by way of service the claim form and other necessary documents. In the course of that letter they noted the comments made by Penningtons about security for costs and expressed the initial view that: "Given the nature of the application, it is by no means clear that there is an entitlement to security", and also expressed the view that any application for security at that stage would be premature.

On 5 August 2004 a without prejudice conversation took place between Mr David Warne of Richards Butler and Mr Henry Page of Penningtons in which, according to his attendance note, Mr Warne indicated that he did not accept that there was any right to security but that he would be prepared to recommend to the Republic that security be provided in the amount of £30,000 within 42 days. His note records that he thought that the £40,000 proposed was excessive, that this was a one and a half to two-day hearing case and that on that basis it was clear that the Commercial Court could not accommodate the hearing before January 2005, which gave a relatively relaxed timetable for the provision of security.

On 10 August Penningtons faxed Richards Butler a one-line fax, which read:

On 23 September Mr Henry Page faxed a letter to Mr David Warne thanking him for "your recent confirmation" of 14 September, and saying:

To my mind the fax of 14 September was a counter-offer because the offer to accept £30,000 by way of security was not expressed to be in respect of the whole of the proceedings. The fax of 23 September was plainly subject to a reservation of the position of Istil if its estimate of costs proved to be insufficient.

On 5 October Richards Butler faxed to Penningtons thanking them for their of fax 23 September, and saying this:

The judge held that in their fax of 5 October Richards Butler were inviting Penningtons to accept that it was not open to Istil to reserve its position and claim for more than £30,000 should the estimate of costs turn out to be insufficient, and that the security was to be provided on the terms set out in the fax of 14 September, namely that it covered the entirety of the Commercial Court proceedings.

The judge further held that when Mr Henry Page wrote the words that he did on the first part of that fax he was giving the confirmation sought, namely that the £30,000, and not some other sum, would cover the proceedings and the whole of the proceedings, and that it would not be open to his clients to seek further sums should the estimate of costs prove to be insufficient. The judge expressly said that he did not accept that by reason of the positioning of the manuscript on the first page of the letter he was confining his assent to a reconfirmation of the terms of the 14 September letter, but leaving open the question whether it was open to Istil to claim some larger sum if the estimate should prove to be insufficient. The judge held that he should be taken as giving the confirmation that was sought in the last paragraph of the letter of 5 October.

On 14 October Richards Butler faxed to Penningtons saying:

With that notation the fax of 14 October was faxed back to Richards Butler for the Republic. On 23 November Richards Butler gave on undertaking limited to £30,000 by way of security.

By an application notice dated 9 September 2005 Istil applied for an order that the Republic provide further security for costs in the sum of £133,538.98 on the ground that there had been a material change of circumstances since the agreement for the provision of security in the sum of £30,000 in October 2004.

The application for further security was supported by the third witness statement of Mr Henry Page. He exhibited the faxes evidencing the agreement to which I have referred. His evidence was that, having discussed the position with counsel, he had formed the view that £30,000 would be sufficient security on the basis of a time estimate of one to one and a half days. However, he relied upon a change of circumstances from early 2005.

A case management conference took place before Morison J on 18 February 2005. He refused to order preliminary issues as to whether the Tribunal's initial award on jurisdiction (which is not challenged under section 67) was a valid award and as to whether the Republic had reserved the rights sufficiently to allow a section 67 application to be made.

In relation to the Republic's application under section 67, Morison J directed:

In April 2005 the Republic served a further witness statement (the fourth) from Mr Mackenzie-Smith with over 50 pages of exhibits relating to the French proceedings. It was accompanied by a statement by Mr Smagulovich of the Republic exhibiting a number of contracts between Karmet, Kazakhstan Sauda and Oltex which were in the Republic's files but which were not before the tribunal.

In July 2005 the Republic served a second, longer, more detailed and wider ranging Kazak law report dealing not only with limitation but with issues of legal personality, agency and assignment. Istil accepts that those points are central to the section 67 application and provided its own expert evidence on the subject in September 2005.

In the meantime on 28 May the Republic applied for permission to adduce expert evidence on French law. Istil resisted the application but the judge granted permission on 16 September. The issue of French law is whether previous unsuccessful proceedings brought by Istil against the Republic in France give rise to any res judicata.

The judge rejected the submission that the agreement that the Republic would provide security for costs in the amount of £30,000 was vitiated by common mistake. He expressed his conclusion in summary in paragraph 31 of his judgment as follows:

The principle he applied is clearly stated in paragraph 23 of his judgment as follows:

The judge, however, held that but for the agreement he would have held that there was a significant and relevant change of circumstances since October 2004 justifying the provision of further security. He put his reasons thus in paragraphs 32 and 33 of his judgment:

In the absence of an agreement as to security for costs the principles are not in dispute. Section 70(6) of the 1996 Act provides:

As the judge observed, that jurisdiction is not dependant on the applicants or appellants being resident anywhere. It is not in dispute that the court had jurisdiction to make an order for security for costs against the Republic under the first paragraph of section 70(6). The court is not, of course, bound to make such an order but has a discretion whether or not to do so. In exercising that discretion, the court must, of course, act justly in accordance with the overriding objective in CPR Part 1.

The correct approach, which is the same as that under CPR 25.12 and 25.13, is again not in dispute and would have been known to experienced solicitors like Richards Butler and Penningtons. It is that where the court has awarded security in respect of, say, the whole of an action or application, it will not make a further order in the absence of a material change of circumstances. However, it will or may do so if there has been a material change of circumstances, depending, of course, upon the circumstances of the particular case: see, for example, Gudmumdur Kristjansson v R Verney and Co Ltd (unreported), a decision of this court made on 18 June 1998. That principle applies where a court makes an order for security for costs and is asked to make a further order. Moreover, it applies whether the first order is made with or without the consent of the parties. Thus it applies, for example, where the parties consent to an order. Subject to the express terms of the agreement it also applies where the parties agree that security will be provided and security is provided pursuant to an agreement without an order.

In my view, if parties want the court to exercise its discretion on different principles they must so provide in their agreement. The agreement must of course be construed in accordance with the ordinary principles of contractual construction. The court should not, however, be astute to hold that parties to such an agreement have departed from the general principle because it seems to me to be important that that principle should be understood and applied and that the court should do nothing to discourage settlement or to increase satellite litigation.

Thus the question in each case is whether the parties have simply agreed that security will be provided in a particular sum, in which case the court will not order more security unless there is a material change of circumstances, or whether they have gone further and agreed that the amount of security to be provided will not be increased even if there is a material change of circumstances. If they have made an agreement of that kind, then I agree with the judge that the correct approach is that stated in paragraph 23 of his judgment which I have already quoted but which it is convenient to set out again in this part of the judgment:

Since the court retains a discretion to do what is just in all the circumstances, it retains a residual discretion to vary the security even if the parties have made an agreement that the security will not be varied even if there is a material change of circumstances. But the court should only exercise that residual discretion in, as the judge put it, wholly exceptional circumstances.

Mr Harvie submits on behalf of Istil that the judge was wrong to hold that further security should not be ordered because of the agreement made in this case. He submits that the judge should have held that the agreement was complete on 14 September. In any event he submits that the agreement was that the Republic would provide £30,000 security for the entirety of the Commercial Court proceedings without more.

I have already referred to the relevant documents. I do not think that the agreement was made on 14 September because the fax of that day was the first document to contain a reference to the entirety of the proceedings. In my opinion, which seems to me to be consistent with that of the judge, the agreement was made when Penningtons sent their fax on 5 October which contained their acceptance of the contents of Richard Butler's fax of 5 October. There is no doubt that it was agreed that the Republic was to provide £30,000 security for costs for the proceedings as a whole, excluding an appeal. There is however an issue between the parties as to whether there was a further term of the agreement and, if so, what it was. The issue arises out of the terms of Pennington's fax of 23 September, Richards Butler's reply of 5 October and Penningtons' notation on that fax which was faxed back to Richards Butler on the same day.

The relevant parts of the faxes which have already quoted in full were these. Penningtons said:

The judge, to my mind correctly, rejected Istil's submission that the manuscript notation left open its reservation of its position should the estimate of costs prove to be insufficient. What then was the position? Mr Malik submits that Penningtons agreed that Istil would not apply for further security even if there was a material change of circumstances. However in my opinion it is not possible to read the faxes as having that meaning. There is no reference to "change of circumstances" in any of them. As I see it, there are two possibilities. The first is that which (as I read his judgment) attracted the judge. The judge said this in paragraph 18:

The second possibility is that it was agreed that it was not open to Penningtons to provide the further security "should our estimate of costs not be sufficient".

I am bound to say that I prefer the first possibility because I agree with the judge that the effect of the fax of 5 October to which Penningtons agreed was simply that there was no reservation of Penningtons' position. However that may be, I have reached the clear conclusion that on either basis there is nothing in the agreement to prevent Istil from seeking further security in the event of a material change of circumstances.

In the case of the first possibility the agreement is simply an example of the ordinary case where parties agree without more that security in a particular sum should be provided to the end of the trial. In the case of the second possibility the only further agreement was that Istil would not be entitled to further security if their estimate of costs was not sufficient. In my opinion the agreement was not that Istil would not be entitled to further security, even if there was a material change of circumstances. As I see it, it follows that the judge was wrong to hold that the agreement between the parties was such that the court should only order further security in wholly exceptional circumstances.

If the principles discussed above are applied to the agreement construed in either of the ways I have described, the correct approach would have been for the court to make an order for further security if it concluded that there was a material change of circumstances and if it thought it right to make such an order in all the circumstances of the case.

As I explained earlier, the judge considered the question whether there was a material change of circumstances in some detail and held that there was. The Republic challenges that conclusion by way of respondent's notice. Mr Malek submits that the judge was right to hold, as he did in paragraph 30 of his judgment, that the truth was that Penningtons made a poor bargain and that, having held in paragraph 32 that it was reasonably foreseeable at the time of the agreement that the Republic and indeed Istil might rely on further factual and expert evidence, there was no material change of circumstances and the judge was wrong to hold that there was.

However, whether there was a material change of circumstances was essentially a matter for the judge involving a consideration of the faxes. It is a decision of a kind with which this court will very rarely interfere. The judge made no error of principle or indeed fact that I can see in this regard. He correctly held that whereas both parties, including the Republic, were originally proceeding on the basis that the scope of the trial or hearing was such that it would last at most one and a half to two days, by the time of the application its scope was such that it was estimated to last twice as long.

As appears from the order made by Morison J on 18 February to which I referred earlier that the reason for that was the extended scope of the issues under section 67. In addition, the Republic subsequently sought and obtained permission to adduce evidence of French law. I see no basis upon which this court could properly interfere with the judge's decision that there was a material change of circumstances. Nor can I see any basis upon which it could interfere with his conclusion that on that basis it would be appropriate to order further security. The considerations in paragraph 33 of the judge's judgment quoted above are to my mind compelling.

As to amount, although it is submitted that any extra securities should be limited to, say, £15,000 to cover the evidence of French law, the judge plainly thought that the amount should reflect the overall position. I see no reason to disagree with him or to fix any figure other than the £120,000 which he said that he would probably have ordered.

It was for these reasons that I concluded that the appeal should be allowed with costs and further security in the sum of £120,000 ordered. The costs were summarily assessed in amounts which were not disputed. Finally I should note that although the order provides for the security to be paid into court it also contemplates that security to the satisfaction of the court can be provided in some other form. Such security would however have to be provided before the time specified in the order failing which the claim will stand struck out without further order.

LORD JUSTICE RICHARDS: I agree with my Lord's judgment and with the reasons he has given.

LORD JUSTICE RICHARDS: I also agree.