What are security for cost orders and how do I get one?

Why do security for costs orders exist?

Imagine you are a defendant in a legal proceeding that should never have been commenced. The plaintiff does not have a legitimate reason (cause of action) against you and has simply commenced proceedings in a desperate attempt to recover money they lost as a result of their own actions.

You fight it out in court for several months and accumulate over $150,000 in legal fees. At the end of a long and drawn-out trial, you come out on the other end victorious, and the court orders  the plaintiff to pay all your costs of the proceeding. You’re relieved, thinking it’s all finally over. However, you then find out the plaintiff has no money and is not in a financial position to pay your costs.

Not only have you been forced to spend countless hours and sleepless nights fighting an unnecessary battle in court, month after month – now you have lawyers hounding you for payment of thousands of dollars in legal fees. That doesn’t sound like much of a victory after all.

Unfortunately, situations like these are not uncommon. Depending on the circumstances of each individual case, there may be an avenue available for defendants who find themselves caught in what appears to be an inevitably losing battle; that is where security for costs come in.

What is a security for costs order?

The purpose of an application for an order for security for costs is to offer the defendant in a legal proceeding peace of mind by forcing the plaintiff to pay to the court a fixed sum that the court considers appropriate to secure the defendant’s costs of and incidental to the proceeding. Security for costs orders serve as protection for defendants with a legitimate concern that a plaintiff may not be able to pay their costs of the proceeding in the event the defendant was to be successful in his or her defence.

In these circumstances, the defendant may apply to the court for an order for security for costs to be paid by the plaintiff into a court fund covering all or part of the defendant’s estimated costs of the proceeding pending the outcome. However, the path to a successful application for a security for costs order is not as simple as it may appear. The courts have wide discretionary powers to determine whether or not to make an order  and have historically been reluctant to do so unless the defendant brings an exceptionally strong case.

Balancing the scales of justice

Where an order for security is given by the court, the plaintiff will be required to provide security for the defendant’s costs by paying the amount ordered into a court fund. Until that security is provided, there will effectively be a stay of the proceedings; in other words, there will be a halt of any further legal process until the plaintiff has met the requirements of the court order. Naturally, this could have a detrimental impact on a plaintiff’s case as it may effectively stop the plaintiff from pursuing their claim.

Due to the weight an order for security for costs may carry, the courts are required to take into account the rights and interests of both opposing parties to the proceedings at all stages during the proceeding. Specifically, in deciding whether or not to make an application for security for costs, the courts must consider factors such as:

• the inherent legal right of a plaintiff to bring legal proceedings, and not be deprived of the opportunity to pursue a claim to its conclusion; and
• the right of a defendant not to be forced to “waste” money by defending an inevitably hopeless case.

Security for costs under the Uniform Civil Procedure Rules 1999 (QLD)

In Queensland, the procedures for security for costs orders are contained in rules 670 to 677  of the Uniform Civil Procedure Rules 1999 (Qld) (UCPR) and section 1335 of the Corporations Act 2001 (Cth) (the Act).

Applications for security for costs are almost exclusively brought against corporations and not individuals.

Rule 671 of the UCPR further sets out a number of circumstances in which the court may elect to order a plaintiff to give security for the defendant’s costs, including but not limited to where:

1. The plaintiff is a corporation and there is reason to believe the plaintiff will not be able to pay the defendant’s costs if ordered to pay them;
2. The plaintiff is suing for the benefit of another person rather than for the plaintiff’s own benefit, and there is reason to believe the plaintiff will not be able to pay the defendant’s costs if ordered to pay them;
3. The address of the plaintiff is not stated or is misstated in the originating process, unless there is reason to believe this was done without intention to deceive;
4. The plaintiff has changed address since the start of the proceeding and there is reason to believe this was done to avoid the consequences of the proceeding;
5. The justice of the case required the making of the order;
6. The plaintiff is, or is about to depart Australia to become, ordinarily resident outside Australia and there is reason to believe the plaintiff has insufficient property of a fixed and permanent nature available for enforcement to pay the defendant’s costs if ordered to pay them;
7. An Act authorises the making of the order; and
8. The justice of the case requires the making of the order.

It is important to note that the court will consider an application for security for costs only if the court is satisfied that at least one of these factors applies.

The threshold test

When an application for security for costs is brought, the onus is on the applicant (defendant) to demonstrate that there is genuine reason to believe that the respondent (plaintiff) will be unable to pay an adverse costs order in the circumstances. This is commonly referred to as the “threshold test”.

In the case of Warren Mitchell Pty Ltd v Australian Maritime Officers Union (1993) 12 ACSR 1, the court stated at [61]:

“The evidence to be relied on must have some characteristic of cogency. Furthermore, speculation as to the insolvency or financial difficulties experienced by the plaintiff company is insufficient to ground the exercise of the [court’s] discretion.”

It follows that mere suspicion that a plaintiff will be unable to pay an adverse costs order will be deemed insufficient to satisfy the threshold test. The test will only be satisfied where there is a genuine possibility the plaintiff company will be unable to pay.

However, the evidence provided will commonly be weighed according to the defendant’s capacity to provide it. It is not necessary for a defendant to provide conclusive evidence to establish the plaintiff’s incapacity to meet a costs order as a matter of probability, or to positively exclude the possibility the plaintiff may be able to pay the defendant’s costs.

Rather, the evidence provided must be sufficiently persuasive to permit a rational belief to be formed. In circumstances where a party resisting a security for costs application fails to adduce relevant and available evidence speaking to its financial capacity to meet an adverse costs order (such as financial reports or evidence of liquid assets), such a finding will, in most circumstances, strongly support a determination that the threshold test is satisfied.

Once a prima facie entitlement to an order for security for costs has been established (i.e. the entitlement is accepted as correct until proven otherwise), the court’s discretionary powers will be enforced, and the evidential onus will then shift to the plaintiff to satisfy the court that, taking all relevant factors into account, the court’s discretion ought to be exercised either by refusing the order for security, or by ordering security in some lesser amount than that sought by the defendant in the application.

The court’s discretion

Even where the court is satisfied that one or more of the factors listed under rule 671 of the UCPR applies, the court still has  unfettered discretion as to whether an order for security for costs should be awarded in the circumstances.

In the High Court case of King v Commercial Bank of Australia Limited [1920] HCA 62, Ruch J stated:

“The legislature […] has left absolute discretion to the court, and has done so without prescribing any rules for its exercise. In these circumstances, no rules can be formulated in advance by any judge as to how the discretion shall be exercised. It depends entirely on the circumstances of each particular case. The discretion must, of course, be exercised judicially, which means that in each case the judge has to inquire how, on the whole, justice will be best served…”

To assist a party seeking to bring an application for security for costs in gauging  the prospects of its success, Her Honour Beazley J in the Federal Court case of KP Cable Investments Pty Ltd v Meltglow Pty Ltd & Ors (1995) 56 FCR 189 set out criteria that the courts may consider determining an application, to help the courts in exercising their discretion:

1. The application should be brought promptly and without delay;
2. The strengths and bona fides of the applicant’s case;
3. The applicant’s impecuniosity was caused by the respondent’s conduct the subject of the claim;
4. The respondent’s application for security is oppressive, in the sense that it is being used merely to deny an impecunious (poor) applicant a right to litigate;
5. There are any persons standing behind the company who are likely to benefit from the litigation and who are willing to provide the necessary security;
6. Persons standing behind the company who are likely to benefit from the litigation and who are willing to provide the necessary security;
7. Persons standing behind the company have offered any personal undertaking to be liable for the costs and, if so, the form of any such undertaking; and
8. Security will only ordinarily be ordered against a party who is in substance a plaintiff, and an order ought not to be made against parties who are defending themselves and are forced to litigate.

Subsequent case law has identified additional discretionary factors which may also be considered by the courts, including:

1. Whether the respondent will be unable to pay the applicant’s costs if the applicant is ultimately successful in the proceeding;
2. Whether the plaintiff is suing for the benefit of other persons who would be immune from the risk and burden of an adverse costs order if it is unsuccessful in the proceedings;
3. Factors peculiar to the circumstances of the proceedings;
4. The genuineness of the proceedings;
5. Whether the plaintiff’s impecuniosity is attributable to the defendant’s conduct;
6. Whether the respondent/plaintiff is a vexatious litigant; and
7. Whether the applicant/defendant is likely to incur substantial legal costs in defending the proceedings;

Some of these discretionary factors have since been codified in rule 672 of the UCPR.

Bringing an application for security for costs

In theory, a defendant may, by way of Notice of Motion, apply to the court seeking an order for security at any time during a proceeding. However, there is a longstanding legal principle that such an application should be made promptly and without delay. If the application is not made expeditiously so that the plaintiff is prejudiced by the delay, the court is more likely to refuse to grant the order.

In the case of Brian E Fencott & Associates Pty Ltd v Eretta Pty Ltd (1987) 15 FCR 497, Justice French stated at 514:

“The further a plaintiff has proceeded in an action and the greater the costs it has been allowed to incur within steps being taken to apply for an order for costs, the more difficult it will be to persuade the court that such an order is not, in the circumstances, unfair or oppressive.”

Accordingly, it is more common, and generally  advantageous, for such an application to be made during the early stages of a proceeding.

Prior to filing an application for security in court, the defendant should also notify the plaintiff in writing that the application is to be made. In some circumstances, the plaintiff may be able to provide sufficient evidence to the defendant of the plaintiff’s financial ability to pay an adverse costs order if and when such an order is made, which may eliminate the need for an application for security for costs to be made altogether.

If an application is brought without the defendant first allowing the plaintiff an opportunity to clarify their financial position, and the plaintiff provides sufficient evidence to satisfy the court of its ability to meet an adverse costs order at the hearing of the application, the application is exceedingly likely to fail, and  the defendant will most likely be ordered to pay the plaintiff’s costs of the application.

How much security will be awarded?

It is important to note that, even if a defendant were to be successful in bringing an application for security for costs, the court has broad discretion to determine the amount of security to be ordered. The court will allow a sum it considers just having regard to all the circumstances of the case by taking a “broad brush” approach to costs, given the difficulty in estimating the defendant’s projected costs. The court may also differentiate between past costs and future costs awarded, although this is not compulsory.

Pasts costs will only be ordered with respect to past costs that are not the subject of a costs order. Where there has been significant delay in bringing the application (i.e. filing the matter after the statute of limitations has passed), the court may choose to substantially discount the amount sought to compensate for any prejudice that may have been caused to the plaintiff.

As to future costs, this is a matter entirely in the discretion of the court. Common practice is generally to award security for discounted standard costs up to the end of the first day of trial and apply discretion as to expected costs following the first day of trial. However, the courts will have full discretion as to what will be considered appropriate having regard to the individual circumstances of each case.

Obtaining security against plaintiffs living outside Australia

The court may award security of costs where the plaintiff is ordinarily a resident outside of Australia. In these circumstances, an application for security should be considered at the outset of the proceedings. A defendant is generally not expected to bear the uncertainty of enforcement of a costs order in a foreign country.

In the case of Anderson v Paterson Securities Ltd [2019] NSWSC 852, Ward CJ stated at 101:

“Difficulty in enforcing an order for costs overseas against a non-resident plaintiff will usually be sufficient to ground an order [for security for costs], especially where there is no reciprocal right of enforcement in the relevant foreign jurisdiction or legislation which may make recovery difficult (see Dense Medium Separation Powders Pty Ltd v Gondwana Chemicals Pty Ltd [2011] NSWCA 84 at [32]-[39] per Young JA).”

The Foreign Judgements Act 1991 (Cth) and Foreign Judgements Regulations Act 1992 (Cth) respectively provide records of foreign jurisdictions with which Australia has a reciprocal right of enforcement.

Delay in bringing an application for security of costs

The case of Kennedy v Nine Network Australia Pty Ltd [2008] QSC 134 highlighted the issue of delay on the defendant’s part in relation to filing an application for security for costs, and though not expressly listed as a factor in rule 672 of the UCPR, it has been regarded as an important discretionary consideration.

Furthermore, case law suggests that if an application for security for costs is not made swiftly, there will be prejudice to the plaintiff. As such, an application for security of costs should be brought promptly and before the party against whom security is sought has expended a significant amount of costs.

Contact Gibbs Wright Litigation Lawyers today

Applications for security for costs can be an effective tool for defendants to ensure they are not forced to fork out thousands of dollars in legal fees in order to present a successful defence, only to find themselves stuck with the bill in the end while an impecunious plaintiff walks away.

If you are currently involved in a legal proceeding and have a genuine concern that the plaintiff is impecunious, or you simply want more information about security for costs orders to determine whether an application may be an option, our experienced litigation lawyers are here to help.

Contact Gibbs Wright today for a confidential consultation about your dispute to discuss your legal rights and options.