Applications for security for costs form an integral part of any litigation strategy.  This is particularly the case where a lender is faced with a claim, or a cross-claim, by a former impecunious corporate customer. 

A successful application has potential of avoiding protracted litigation which results in an overall saving of litigation costs. 

The recent amendments to the Uniform Civil Procedure Rules 2005 which came into effect on 9 August 2013 provide further guidance on factors relevant to the Court’s discretion when ordering security for costs.

Effect of an order for security for costs

An order for security for costs results in a stay of a claim against the lender until security is provided and may ultimately result in the dismissal of the claim if the order is not complied with.  

The parties may agree on the security for costs amount prior to the hearing of the application which achieves the desired outcome for the lender whilst avoiding the costs associated with the hearing of the application.  The consent orders should provide for dismissal of the borrower’s claim with costs in circumstances where the agreed sum is not paid.

Staged approach to security

The application for security for costs should be brought without delay. 

In complex litigation scenarios, it may be impossible to provide an estimate of the costs likely to be incurred in defending a claim at an early stage of the proceedings.  In those circumstances, lenders may adopt a staged approach to seeking security for costs (e.g. by seeking costs up to the conclusion of discovery in the initial application and bringing further applications at a later stage in the proceedings). 

This approach may allow the lender to test the Court’s appetite to make an order for security at an early stage in the proceedings and, if appropriate, come back for more security once the claimant’s case on damages becomes more defined. 

Amendments to the UCPR

The recent amendments to the UCPR give effect to certain recommendations made by the New South Wales Law Reform Commission in its report titled Security for Costs and Associated Costs Orders 137 (2012). 

The amendments were approved by the Uniform Rules Committee on 5 August 2013 and came into effect on 9 August 2013. 

The amendments include the following:

  • A new rule 42.21(1A) which is a non-exhaustive list of matters to which the Court may have regard in exercising its discretion whether to order security for costs. 

The amendments were in part based on the list of discretionary factors contained in rule 672 of the Uniform Civil Procedure Rules 1999 (Qld).  

Prior to the amendments, these factors in NSW were solely contained in the case law.  

The list is non-exhaustive, meaning that it is intended to identify the key factors that have been recognised by the case law rather than identify all possible relevant factors.  In the Commission’s view, such a list is desirable to make the identification of such factors easier and more accessible to those involved in the proceedings.  

  • New rules 50.8(2A) and 51.50(2A) which introduce an express legislative power to dismiss an appeal or cross-appeal for failure to provide security.  This amendment promotes clarity.  The Court of Appeal also has the power to dismiss the appeal or cross-appeal for failure to provide security pursuant to its inherent jurisdiction. 

Should security for costs application be part of my litigation strategy?

The security for costs applications are not without risk as they are often vigorously defended.

For example, an application may be lost where a borrower persuades the Court that its impecuniosity was caused or contributed to by the conduct of the lender.  “Whether the impecuniosity is attributable to the defendant’s conduct” is one of the non-exhaustive factors contained in the new rule. 

In exercising its discretion, the Court will look to a range of other factors (including “prospects of success or merits of the proceedings”) in the attempt to strike a balance between providing plaintiffs access to the court system regardless of their financial status and protecting the successful defendants from being out-of-pocket for their litigation costs. 

Any party contemplating a security for costs application should undertake a broader analysis of the merits associated with the application as compared to the costs of making the application.