To minimise the risk of substantial collateral financial loss, the court, on evidence of a plaintiff’s impecuniosity, may make an order that the plaintiff pay money into court as security. In the event that the plaintiff is unsuccessful in its case and is ultimately ordered to pay the defendant’s costs, the defendant may recover its costs from those monies ordered as security – this court process is referred to as security for costs.
While potential litigants should not be discouraged from seeking justice through the legal system, what happens when a plaintiff is unsuccessful in their claim but cannot pay the costs of a defendant that has been put to the substantial expense of successfully defending proceedings?
Power to order security for costs
In NSW, security for costs applications are largely governed by regulation 42.21 of the Uniform Civil Procedure Rules 2005 (NSW) (“UCPR”). Regulation 42.21(1)(d) of the UCPR states that if in any proceedings, it appears on the application of the defendant that the plaintiff will be unable to pay the defendant’s costs if so ordered, the court may order the plaintiff to give such security it thinks fit, in such manner as it directs, for the defendant’s costs of the proceedings. The court may also order that the proceedings be stayed until such time that the security is given.
The court has additional discretionary power to order security for costs if the plaintiff is a corporation. Pursuant to section 1335(1) of the Corporations Act 2001 (Cth), where a corporation is plaintiff in any action or other legal proceeding, the court may require sufficient security be paid into court where there is reason to believe that the corporation will be unable to pay the costs of the defendant, if for example, the plaintiff’s claim is not successful.
Unlike the Local and District Courts, the Supreme Court of NSW also has inherent jurisdiction to regulate court’s procedures to prevent abuses of process – this extends to the making of orders for security for costs.
What will the court consider when making an order for security for costs?
The court’s power to make an order for security for costs is discretionary and involves considering all relevant circumstances so as to strike a balance between protecting a defendant while avoiding the ‘stifling’ of a plaintiff’s reasonable access to prosecute a claim.
A non-exhaustive list of relevant factors the court can consider is set out in regulation 42.21(1A) of the UCPR. The common factors are summarised in the table below:
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The prospects of success or merits of the proceedings |
If the plaintiff’s claim discloses a cause of action and has reasonable prospects of success, the court will generally not make an order for security of costs. |
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The genuineness of the proceedings |
The court may consider the plaintiff’s motivation in commencing proceedings including whether the plaintiff’s claim is bona fide or vexatious. |
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The impecuniosity of the plaintiff |
The threshold factor that ‘triggers’ the court’s discretionary power is whether there is proof of the plaintiff’s unsatisfactory financial position. Mere speculation that a plaintiff is insolvent or experiencing financial difficulties is not sufficient: Warren Mitchell Pty Ltd v Australian Maritime Officers’ Union (1993) 12 ACSR 1. |
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Whether the plaintiff’s impecuniosity is attributable to the defendant |
A plaintiff may very well be impecunious because of or for reasons including the defendant’s conduct. The court should decline to make an order for security for costs, where the litigation may |
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Whether the plaintiff is effectively in position of the defendant |
The court will not ordinarily make an order for security where a plaintiff has been forced to commence litigation in order to defend themselves. |
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Whether the plaintiff ordinarily resides outside of the jurisdiction |
There may be difficulties in enforcing an adverse costs order against a plaintiff that ordinarily resides outside of the jurisdiction. |
How can I apply for security for costs?
An application for security for costs should be made by notice of motion filed by the defendant and should be supported by credible testimony of the plaintiff’s impecuniosity. While applications should be brought as early as possible in proceedings (and this is a factor the court can consider) the Supreme Court of NSW in Idoport Pty Ltd v National Australia Bank [2001] NSWSC 744 noted at [70] that delay “does not necessarily render the application fatal”.
How is the amount of security calculated?
The amount of security fixed by the court is calculated by reference to the amount the defendant is likely to recover in a cost order at the end of the proceedings. Ideally, an estimate will be provided by a costs assessor or an experienced solicitor. The assessment of the requested amount can take into consideration the defendant’s costs for any relevant steps to conclude proceedings, including obtaining witness statements, issuing subpoenas and briefing counsel for hearing.
The court made an order for security for costs – what next?
If the court has made an order for security for costs, the proceedings are generally stayed until the plaintiff complies with the order and makes payment of the security. The security does not necessarily have to be payment of money into court and can, subject to court orders, include bank bonds or be placed into a joint bank account in the name of the parties’ solicitors.
Where the plaintiff fails to comply with an order for security for costs, regulation 42.21(3) of the UCPR allows the court to dismiss the plaintiff’s claim.
We’re here to help.
If you are a defendant to a proceeding and are concerned that the plaintiff may not be able to pay your costs, or if you require any advice on responding to a security for costs application, please contact our experienced litigation lawyers today.
