Part 3: Security for costs applications in the context of cross-claims

In this Part 3 of our series of articles on the topic of security for costs, we consider how security for costs applications are dealt with in the context of cross-claims.

We saw in Part 1 of this series that to succeed in such an application, it is necessary to satisfy both the jurisdictional and discretionary tests, and in Part 2 we saw that the court will give considerable weight to the substance of a party’s involvement in the proceedings and will be reluctant to order security for costs in favour of a party that is in truly the legal “aggressor”.

Security for costs applications in the context of cross-claims produce interesting results given that, theoretically, each party can be a party attacking and a party defending. So which party (if any) is entitled to security for costs in these circumstances?

Security for costs and cross-claims

Security for costs applications can arise in proceedings involving cross-claims in a number of scenarios. For instance, a plaintiff might seek to oppose an application brought by a defendant seeking security for its own costs on the basis that the defendant is also a cross-claimant; similarly, a plaintiff/cross-defendant’s threat to make an application might be met with an equal threat from the defendant/cross-claimant.

Generally, as noted above, the answer to this question involves an assessment of the nature of the respective roles of the parties to the proceedings. A useful way to consider how this works in practice is to draw on a couple of examples, which we do below.

A question of quantum?

Where a cross-claim has been brought ‘defensively’ in response to the plaintiff’s claim, the court will not ordinarily order security for costs against that cross-claimant.

One indicator as to whether proceedings have been brought defensively is whether the cross-claimant’s claim ‘cancels out’ the plaintiff’s claim, or whether the cross-claim goes well beyond what the plaintiff’s claim has raised, such that the cross-claimant is in truth in the position of aggressor.

In the latter scenario, the court may grant an order against the cross-claimant to give security for costs, notwithstanding that the plaintiff was responsible for initially compelling the defendant/cross-claimant to the proceedings.

For example, in the matter of Saint-Gobain RF Pty Ltd v Maax Spa Corporation Pty Ltd [2004] VSC 335, Saint-Gobain (the plaintiff) brought an action against Maax Spa (the defendant) for the sum of $221,886.68 which it said was owing under a credit supply agreement. Maax Spa then brought a cross-claim against Saint-Gobain for the amount of $917,737 on the basis of alleged misrepresentations, claiming breaches of fair trading and trade practices legislation and negligence.

Saint-Gobain subsequently brought an application seeking security for its costs against Maax Spa, who attempted to resist it on the basis that Saint-Gobain had instigated the litigation, and that Maax Spa had simply counter-claimed on the same front in defence of its position.

Habersberger J found that “this is one of those possibly rare cases where a counterclaimant should be required to give security for costs”. The Court, in ordering Saint-Gobain to provide security, found the following::

  • The Court was not satisfied that Maxx-Spa (the cross-claimant’s) claim was simply defensive;
  • Maxx Spa’s claim was ‘a claim for significant damages which will occupy virtually all of the time spent at trial’; and
  • This meant that Maxx Spa was no longer a ‘compulsory party’ and had assumed the position of plaintiff.

This decision is an example of those which demonstrate that where a cross-claimant’s claim ‘overshadows’ the plaintiff’s claim to a substantial degree in terms of quantum and/or the court’s time to deal with the issues raised, this will be relevant to the exercise of the court’s characterisation of the cross-claimant as the aggressor, and will weigh in favour of the court granting an application by the plaintiff against a cross-claimant.

A matter of similarity?

Another relevant factor that will weigh in the court’s discretion is whether the cross-claim traverses the same or substantially the same matters as the claim.

In circumstances where a claim and cross-claim raise substantially the same matters, this will be a strong factor to show that an order for security for costs should not be made.

One rationale behind this is that, where a claim and cross-claim raise substantially the same matters, it would be unjust to require the plaintiff (or the cross-claimant) to provide security for costs, because this would allow the defendant to pursue its cross-claim whilst possibly stifling the plaintiff’s ability to pursue not only its claim, but also to defend the cross-claim.

The case of Sydmar Pty Ltd v Statewise Developments Pty Ltd (1987) 11 ACLR helps to elucidate this point. In Sydmar, the plaintiff’s claim and the defendant’s cross-claim arose out of alleged breaches of contract.

The Court refused the defendant/cross-claimant’s application for security for costs on a number of bases. One of these bases was that it would be inappropriate to require the plaintiff to provide security, because it would “effectively reduce the moneys available to it to resist the defendant’s cross-claim”.

In a similar vein, the Court made the following comments:

“The court would be slow to allow a situation where the action is stayed because of the inability to provide security but the cross-action covering substantially the same factual areas proceeds.”

Whilst this is clearly a powerful factor, the fundamental question comes back to whether the defendant has brought their cross-claim defensively. That is, if the cross-claim is purely characterised as being defensive (for instance if it is a cross-claim by way of set-off of the plaintiff’s claim in respect of the same matters), then the fact of the cross-claim being brought is unlikely to assist the plaintiff in resisting a security for costs application against it. It will depend on the circumstances of the case.

‘Dalma Formwork’ undertaking – the cross-claimant’s trump card

If you are the defendant/cross-claimant in a matter and wish to make a security for costs application against the plaintiff, but your ability to do so is stifled by the fact that the claim and cross-claim deal with substantially the same matters, the courts have a solution for you - a ‘Dalma Formwork’ undertaking.

The name derives from the Court’s decision in the matter of Dalma Formwork Pty Ltd (Administrator Appointed) v Concrete Constructions Group Limited [1998] NSWSC 472. In that case, Rolfe J acknowledged that where a claim and cross-claim arise out of the same, or essentially the same, factual matrix, this will be “a very important consideration”, and that “an order for security will not generally be made in those circumstances.

However, is Honour also stated (importantly) that:

[t]his situation can be overcome by a defendant if it unequivocally states that it will not pursue any claims against the plaintiff in the event of an order for security being made and not met.”

In other words, if the defendant undertakes not to press its cross-claim in the event that the proceedings are stayed or dismissed due to the plaintiff’s failure to comply with an order to provide security, this will provide strong grounds to the defendant to seek that the plaintiff provide security for costs (notwithstanding that the claim and cross-claim traverse the same matters).

This is useful to note for parties who have been forced to agitate a claim defensively - a defendant who has filed a cross-claim as a defensive strategy to a plaintiff’s claim may be prepared to abandon its claim if it will not be required to respond to the plaintiff’s claim in the event the plaintiff fails to provide security.

Concluding thoughts

The situations summarised above raise interesting questions concerning the court’s application of the discretionary test in the context of cross-claims.

If you are considering making an application for security for costs, or are on the receiving end of a foreshadowed application where cross-claims are involved, it is important to keep in mind that in determining whether to grant such an application, the court will take into account all relevant matters in the proceedings to ascertain the substance of the respective parties’ roles.

This will involve considerations of the nature and/or quantum of the parties’ respective claims and whether the claim and cross-claim traverse the same or substantially the same subject matter, amongst any other relevant factors.

The fact of a cross-claim being brought will not necessarily preclude a court from granting security for costs in favour of either the plaintiff or cross-claimant; it is simply a matter to be weighed in the court’s discretion. That being said, the examples and indicators explored above will assist in making an informed assessment of the prospects of any such application in proceedings involving cross-claims which have been made, or are anticipated to be made.

If you would like any further information regarding the above or any of the other articles in this series or if you have any feedback generally we welcome you to contact us.