Part 1: Summary of key legal principles
Security for costs applications are a common feature of litigated civil disputes. They serve an important role for defendants who have concerns about a plaintiff’s ability to pay their costs of defending proceedings should the plaintiff’s claim fail. They are also often employed by parties strategically and to apply pressure or cause delay to plaintiffs.
Security for costs is a broad topic worthy of specific examination as parties involved in litigation are regularly unaware or have misconceptions about how these types of applications work and about some of the particularities and technicalities which can affect their success or failure.
Over the coming months, we will publish a number of separate articles which will deal with topics and practice tips for aspects which are of particular importance or ones which in our experience are commonly misapplied or misunderstood.
This first article in this series will outline in broad terms the tests that apply to security for costs applications as well as some useful considerations in making such applications from the perspective of plaintiff and defendant.
The rationale behind security for costs is the consideration that the party who has prompted the litigation (often referred to as the “aggressor”, and which is generally the plaintiff) has compelled a party to respond to the proceedings, such that it should be required to provide security for the respondent’s costs so that, in the event that the aggressor is ultimately unsuccessful, the other party (or parties) will have some measure of protection to avoid the risk that any adverse costs order against the aggressor will be unrecoverable.
Depending on the circumstances and jurisdiction of the proceedings, a defendant can apply for security for costs under section 1335(1) of the Corporations Act (where the plaintiff is a corporation), Rule 42.21 of the Uniform Civil Procedure Rules (“the UCPR”) (where the proceedings are in the NSW Local Court, District Court or Supreme Court), or section 56(1) of the Federal Court of Australia Act.
Successful applications for security for costs will generally result in the court directing the plaintiff to provide security in such manner as the Court thinks fit, commonly by way of bank guarantee or deposit of money into court. Ordinarily, if a party is ordered to provide security, proceedings will be stayed until the plaintiff provides security as directed by the court, and if the plaintiff fails to comply with the order after a certain period of time, the court may dismiss the proceedings.
Tests and considerations
For an application to be successful, the defendant must address the following tests:
- First, the defendant must demonstrate the threshold issue that there is reason to believe that the plaintiff will be unable to pay the costs of the defendant if ordered to do so (the Jurisdictional Question).
- Second, the Court must be satisfied that it should exercise its discretion in favour of granting the relief sought (the Discretionary Question).
Whilst the majority of security for costs applications are brought on the basis that there is reason to believe that the plaintiff is impecunious, UCPR r.42.21 outlines a number of other circumstances that may enliven the Court’s jurisdiction to order security, including where:
- the plaintiff is ordinarily resident outside Australia;
- the plaintiff is suing, not for his or her own benefit, but for the benefit of some other person and there is reason to believe that the plaintiff will be unable to pay the costs of the defendant if ordered to do so; or
- there is reason to believe that the plaintiff has divested assets with the intention of avoiding the consequences of the proceedings.
Before making an application to the Court, a defendant will ordinarily first raise its concern with the plaintiff, and allow it an opportunity to allay those concerns. This usually takes the form of a request for the plaintiff to provide financial statements to demonstrate that it has capacity to pay any adverse costs order. If the plaintiff refuses to provide these materials (noting that there may be strategic reasons not to provide financial documents), the defendant will then seek to use that failure as a basis for making their application.
In the event the defendant can support its concerns about the plaintiff’s capacity to pay, the parties will often reach agreement on the amount of security to be provided. However, if agreement cannot be reached, an application to the Court will be necessary to compel the provision of security.
Making the application
As noted above, for an application for security for costs to be successful, it is not enough for the defendant to demonstrate to the Court that the plaintiff would be unable to pay the defendant’s reasonable costs in the event it is unsuccessful. The defendant must also demonstrate to the Court that it ought to exercise its discretion in favour of granting security.
As to this ‘Discretionary Question’, the Court may take into account any matter it considers relevant to its decision whether or not to grant security. UCPR r.42.21 provides some guidance around the matters that may be considered, which include (amongst other matters):
- the prospects of success or merits of the aggressor’s claim;
- the impecuniosity of the plaintiff;
- whether the plaintiff’s impecuniosity is attributable to the defendant’s conduct;
- whether the plaintiff is effectively in the position of a defendant;
- whether an order for security for costs would stifle the proceedings; and
- whether an order for costs made against the plaintiff would be enforceable within Australia.
In making its application, a defendant will need to provide evidence as to the circumstances justifying their concern about the plaintiff’s impecuniosity, as well as adequately addressing the above discretionary factors (if relevant) in order for the Court to grant security for costs against the plaintiff.
In terms of the quantum of any order for security, the defendant should provide evidence of the costs that it seeks be provided by way of security, including as to the likely costs that the defendant anticipates incurring going forward. In this regard, it is important to note that an application for security for costs should be made promptly in the proceedings, as any unjustified delay on the part of the defendant will be relevant to the Court’s exercise of its discretion, and may affect the amount of security that is granted.
There are numerous academic sources, commentaries and articles in the public domain which summarise and analyse the Court’s exercise of discretion and application of the above matters.
In the future articles in this series we will instead focus on a selection of the more peculiar issues that may arise in security for costs applications, including, security for costs applications where the defendant is the aggressor, security for costs in the context of cross-claims, and whether an applicant is able to seek security in respect of costs that have already been incurred.