Security for Costs

The fundamental principle is the right of a litigant to pursue and enforce rights in the courts.

“The basic rule that a natural person who sues will not be ordered to give security for costs, however poor, is ancient and well established”: Pearson v Naydler [1977] 1 WLR 899 at 902.

The general rule is, therefore, “that poverty is no bar to a litigant”: Cowell v Taylor (1885) 31 Ch D 34 at 38. See generally Oshlack v Richmond River Council [1998] HCA 11.

This general rule is not, however, absolute: Melville v Craig Nowlan & Associates Pty Ltd (2001) 54 NSWLR 82 at 108; Morris v Hanley [2000] NSWSC 957 at [11]–[21]. The exercise of the power to order security for costs is a balancing process, requiring the doing of justice between the parties.

The court must have a concern to achieve a balance between ensuring that adequate and fair protection is provided to the defendant, and avoiding injustice to an impecunious plaintiff by unnecessarily shutting it out or prejudicing it in the conduct of the proceedings: Idoport Pty Ltd v National Australia Bank Ltd [2001] NSWSC 744 at [47].

[2-5910] The power to order security for costs

The power to order that security be provided for costs may be derived from various sources: Fiduciary Ltd v Morningstar Research Pty Ltd (2004) 208 ALR 564 at [34]; Idoport, above, at [16]. The Supreme Court has inherent jurisdiction: Morris v Hanley [2000] NSWSC 957; Bhagat v Murphy [2000] NSWSC 892. The District Court and Local Court do not, however, have inherent jurisdiction per se: Philips Electronics Australia Pty Ltd v Matthews (2002) 54 NSWLR 598 at [50]–[53].

In the case of corporations, s 1335 of the Corporations Act 2001 (Cth) gives power. Otherwise, the power must be derived from rules of court, such as UCPR Pt 42.

[2-5920] Exercising the discretion to order security

The power to order security for costs is discretionary and the order will not be automatic: Idoport at [20], [56]–[57] and [60]–[62]. The discretion is to be exercised judicially, and not “arbitrarily, capriciously or so as to frustrate the legislative intent”: Oshlack, above, at [22].

Exercise of the power requires consideration of the particular facts of the case: Merribee Pastoral Industries v Australia and New Zealand Banking Group Ltd (1998) 193 CLR 502.

The factors that may be taken into account are, however, unrestricted, provided they are relevant: Morris v Hanley, above; Southern Cross Exploration NL v Fire and All Risks Insurance Co Ltd (1985) 1 NSWLR 114. The weight to be given to any circumstance depends upon its own intrinsic persuasiveness and its impact on other circumstances which have to be weighed: Acohs Pty Ltd v Ucorp Pty Ltd (2006) 236 ALR 143 at [12].

[2-5930] General principles relevant to the exercise of the
discretion

The relevant factors to be taken into account in exercising the discretion cannot be stated exhaustively and will vary from case to case: Idoport, above, at [48]. Attempts have been made to categorise these factors in such cases as: KP Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 56 FCR 189; Equity Access Ltd v Westpac Banking Corp [1989] ATPR 50,631(¶40-972); Tradestock Pty Ltd v TNT (Management) Pty Ltd (1977) 14 ALR 52 and Gujarat NRE Australia Pty Ltd v Williams [2006] NSWSC 992 at [27]. I have chosen to group them under the following headings.

1.The impecuniosity of the plaintiff
The court must first consider the threshold question of whether there is credible testimony to establish that the plaintiff will be unable to pay the defendant’s costs if the defendant is ultimately successful: Idoport, above, at [2], [35] and [60].

However, once the defendant has led credible evidence of impecuniosity, an evidentiary onus falls on the plaintiff to satisfy the court that, taking into account all relevant factors, the court’s discretion should be exercised by either refusing to order security or by ordering security in a lesser amount than that sought by the defendant: Idoport at [62] and [65]. In other words, proof of the unsatisfactory financial position of the plaintiff “triggers” the court’s discretion: Fiduciary Ltd, above, at [35]–[36]; Thalanga Copper Mines Pty Ltd v Brandrill Ltd [2004] NSWSC 349 at [12]–[13]; Acohs, above, at [10].

2.The bona fides of the claim
Whether the claim is bona fide or a sham is a relevant consideration, and the court will take into account the motivation of a plaintiff in bringing the proceedings: Bhagat v Murphy [2000] NSWSC 892 at [20]–[21].

Examples include an unsatisfactory pleading, or a vexatious claim (Bhagat at [26]), particularly where the plaintiff is self-represented with “abundant time” to pursue incessant and numerous applications: Lall v 53–55 Hall Street Pty Ltd [1978] 1 NSWLR 310 at 313–314.

3.The stultification factor
Where the effect of an order for security would be to stifle or end the plaintiff’s claim, this is an important consideration to be weighed, particularly in light of the poverty rule: Fiduciary Ltd, above, at [72]; Staff Development & Training Centre Pty Ltd v Commonwealth of Australia [2005] FCA 1643 at [39].

It is appropriate to examine whether the impecunious plaintiff is, in reality, the defender in the proceedings, and not the attacker: Amalgamated Mining Services Pty Ltd v Warman International Ltd (1988) 19 FCR 324 at 67–8. It is also appropriate to look behind the actual litigant to examine the means of others who stand to benefit from the litigation: Acohs, above, at [49]; Citrus Queensland Pty Ltd v Sunstate Orchards Pty Ltd [2006] FCA 1672 at [38.8].

4.The prospects of success of the claim
A consideration of the plaintiff’s prospects of success is an important element of balancing justice between the parties. However, care needs to be exercised when assessing the proportionate strength of the cases of the parties at the early stages of proceedings: Fiduciary Ltd v Morningstar Research Pty Ltd (2004) 208 ALR 564 at [39].
As a general rule, where a claim is prima facie regular on its face and discloses a cause of action, then in the absence of evidence to the contrary, the court should proceed on the basis that the claim is bona fide and has reasonable prospects of success: K P Cable Investments, above, at 197; Staff Development & Training Centre, above, at [12]–[13].

5.The causation factor
Where the plaintiff’s lack of funds has been caused or contributed to by the defendant, the court will take this consideration into account. This has been described as the “causation” factor: Fiduciary Ltd, above, at [85]–[101]. It is a relevant consideration that an order would effectively shut a party out of relief in circumstances where that party’s impecuniosity is itself a matter which the litigation may help to cure: Merribee Pastoral Industries, above, at [26.4(g)].

However, a plaintiff cannot rely on the poverty rule where he or she has so organised their affairs so as to shelter assets: Rajski v Computer Manufacture & Design Pty Ltd [1982] 2 NSWLR 443 at 452. In Dae Boong International Co Pty Ltd v Gray [2009] NSWCA 11 at [34] it was said that in determining the causation factor it is not inappropriate to have some regard to the apparent strength of the case.

6.Nominal or representative plaintiffs
It is a relevant consideration, in balancing the interests of a defendant, that the plaintiff is suing for the benefit of other persons who are immune from the burden of an adverse costs order: Idoport at [31] ff. This factor has received increased attention in modern litigation with the advent of commercial litigation funding and insurance.

The relevant principles are discussed more fully below in “Nominal plaintiffs” at [2-5950]. Representative plaintiffs are to be distinguished from nominal plaintiffs who have no personal interest and merely act in a representative capacity (such as executors, and trustees).

7.Foreign plaintiffs
See r 42.21(1). Where a plaintiff is ordinarily resident outside Australia and has no assets in the jurisdiction, there must be weighty reasons why an order for security for costs should not be made: Cheng Xi Shipyard v The Ship “Falcon Trident” [2006] FCA 759 at [9].

A defendant is not expected to bear the uncertainty of enforcement in a foreign country: Gujarat NRE Australia Pty Ltd v Williams, above, at [29]. The difficulty in enforcing an order for costs overseas against a non-resident plaintiff will usually be sufficient to ground an order: Shackles & Daru Fish Supplies Pty Ltd v Broken Hill Proprietary Co Ltd [1996] 2 VR 427, especially where there is no reciprocal right of enforcement in the relevant foreign jurisdiction: Energy Drilling Inc v Petroz NL [1989] ATPR ¶40-954 at 50,422.

8.Delay
Applications for security should be brought promptly. Delay by a defendant is a relevant factor in the exercise of the discretion: Idoport at [68]. A corporate plaintiff is entitled to know its position “at the outset”, before it embarks to any real extent on its litigation: Buckley v Bennell Design & Constructions Pty Ltd (1974) 1 ACLR 301 at 309.

However, the passage of time is but a factor to be taken into account in the balancing exercise: Southern Cross Exploration NL v Fire & All Risks Insurance Co Ltd (1985) 1 NSWLR 114 at 123 ff; Thalanga, above, at [25]–[26]; P M Sulcs & Associates Pty Ltd v Daihatsu Australia Pty Ltd (No 2) [2000] NSWSC 826. The delay must be weighed not only in terms of prejudice, but also in terms of the factors that have led to the delay: Acohs, above, at [61] ff.

9.Public interest
If the proceedings raise matters of general public importance, this may be a factor relevant to the discretion, such as, for example, a case in which the area of law involved requires clarification for the benefit of a wider group than the particular plaintiff: Merribee Pastoral Industries, above, at 13; Soh v Commonwealth of Australia (2006) 231 ALR 425 at [26].

10.Other considerations
The court will also take into account particular factors peculiar to the circumstances of the proceedings: Equity Access Ltd v Westpac Banking Corp [1989] ATPR ¶40-972. Other relevant factors considered by the courts include: that the parties or some of them are legally aided, see Webster v Lampard (1993) 177 CLR 598; that the likely order as to costs, even if successful, may not be in favour of the winning defendant, see Singer v Berghouse (1993) 114 ALR 521 at 522; that the plaintiff is a vexatious litigant, particularly where self-represented, see Lall v 53–55 Hall Street Pty Ltd [1978] 1 NSWLR 310 at 313–314; that the proportionality of the costs to the activity or undertaking the subject of the claim is so minuscule as to impose an undue hardship on an already vulnerable plaintiff, see Shackles & Daru Fish Supplies Pty Ltd v Broken Hill Proprietary Co Ltd, above, at 432; and the relative disparity of resources of the parties, see P M Sulcs v Daihatsu Australia Pty Ltd (No 2) [2000] NSWSC 826 at [82].

[2-5940] Issues specific to the grounds in r 42.21(1)

1.The plaintiff has misstated or changed address
These grounds require proof that a plaintiff has failed to state an address, or has misstated an address, with the intention to deceive, or has changed address with a view to avoiding the consequences of an adverse costs order: Knight v Ponsonby [1925] 1 KB 545 at 522.

2.The plaintiff is a corporation
It is not sufficient to prove simply that the plaintiff is a corporation. There must be some credible testimony that the corporation is likely to be unable to pay the defendant’s costs, if unsuccessful. The test for the application of r 42.21(1)(d) is substantially similar to that for s 1335 of the Corporations Act 2001 (Cth) (Fitzpatrick v Waterstreet (1995) 18 ACSR 694), and this topic is therefore considered together with the section below on “Corporations” at [2-5960]. ]

3.The plaintiff is suing for the benefit of someone else
See Riot Nominees Pty Ltd v Suzuki Australia Pty Ltd (1981) 34 ALR 653. This ground overlaps the inherent jurisdiction and is discussed more fully below in the section on “Nominal plaintiffs”. The discretion is more likely to be exercised where the nominal plaintiff has insufficient assets within the jurisdiction: Bellgrove v Marine & General Insurance Services Pty Ltd (1996) 5 Tas R 409. See below under “Nominal plaintiffs”.

[2-5950] Nominal plaintiffs

The real plaintiff is not allowed to seek to enforce a right through a nominal plaintiff who is a person of straw: Sykes v Sykes (1869) LR 4 CP 645 at 648; Riot Nominees Pty Ltd v Suzuki Australia Pty Ltd, above. A nominal plaintiff is “nothing but a puppet for some third party, a mere shadow, in the sense that he has parted with any right he may have had in the subject matter”: Andrews v Caltex Oil (Aust) Pty Ltd (1982) 40 ALR 305.

The poverty rule must be qualified in circumstances where the claim is put forward on behalf of others: Grizonic v Suttor [2006] NSWSC 1359 at [20]. See also Fiduciary at [79].

The involvement of third-party funders with no pre-existing interest in the proceedings, who are in some instances resident out of Australia but who stand to benefit substantially from any recovery from the proceedings is a material consideration: Idoport at [107]; Chartspike Pty Ltd v Chahoud [2001] NSWSC 585. It is fair for the courts to proceed on a basis which reflects the proposition that those who seek to benefit from litigation should bear the risks and burdens that the process entails: Fiduciary at [83]; Chartspike Pty Ltd v Chahoud, above, at [5].

[2-5960] Corporations

The power to order security for costs against corporations is derived from UCPR r 42.21(1)(d) (and r 51.50 in the case of appeals) and from s 1335 of the Corporations Act 2001 (Cth). The Supreme Court also has inherent jurisdiction in order to regulate the court’s procedures and processes and to prevent abuse of process: Green (as liquidator of Arimco Mining Pty Ltd v CGU Insurance Ltd [2008] NSWCA 148 at [33]–[35].

Corporations are in a different category from natural person plaintiffs: Pacific Acceptance Corp Ltd v Forsyth (No 2) [1967] 2 NSWR 402 at 407; Fiduciary Ltd at [53]; Idoport at [53]–[59]; KP Cable Investments; Whyked Pty Ltd v Yahoo Australia and New Zealand Ltd [2006] NSWSC 1236 at [25].

A corporation which seeks to rely on the stultification factor must also demonstrate that those standing behind it, likely to benefit from the litigation, such as shareholders and creditors, are also without means to satisfy an adverse costs order. It is not for the party seeking security to raise such issues: Thalanga Copper Mines Pty Ltd v Brandrill Ltd, above, at [12]–[18]; Acohs at [42] ff. Similarly, where there is a third party funder: Green (as liquidator of Arimco Mining Pty Ltd v CGU Insurance Ltd [2008] NSWCA 148 at [51].

Where the litigation is being pursued by a liquidator, the court should not treat an application for security at large, but should have regard to guidelines as set out in Green (as liquidator of Arimco Mining Pty Ltd v CGU Insurance Ltd [2008] NSWCA 148 at [45].

[2-5970] Amount and nature of security to be provided

Fixing the amount to be provided by way of security is part of the exercise of the court’s discretion: Fiduciary at [132]. The court will therefore require evidence by which it might estimate the defendant’s probable recoverable costs: see for example the evidence adduced in such cases as Fiduciary; Idoport; and Gujarat NRE Australia Pty Ltd v Williams [2006] NSWSC 1131; Western Export Services Inc v Jireh International Pty Limited [2008] NSWSC 601.

The security may take such form as the court considers will provide adequate protection to the defendant. This might include, in addition to traditional payment into court, guarantees, charges or the provision of a bank bond: Estates Property Investment Corp Ltd v Pooley (1975) 3 ACLR 256. See generally G Dal Pont, Law of Costs, LexisNexis Butterworths, Sydney, 2003 at [28.43]. It may in some cases be appropriate to stage the payments: Idoport at [156]; KDL Building v Mount [2006] NSWSC 474 at [36].

[2-5980] Practical considerations when applying for security

1.Timing of an application
It is important to foreshadow any application in correspondence: Crypta Fuels Pty Ltd v Svelte Corp Pty Ltd (1995) 19 ACSR 68 at 71. The court will exercise care when assessing the proportionate strength of the cases of the parties at the early stages of proceedings: Fiduciary Ltd at [39].

2.Multiple parties
Difficulties arise where there are two or more plaintiffs, including one or more individuals and one or more corporations, or where one or more of the plaintiffs resides overseas; or where the prospects of success vary as amongst the co-plaintiffs: Fiduciary Ltd at [54] ff. Similarly, when only one of several defendants applies for security: Gujarat NRE Australia Pty Ltd v Williams [2006] NSWSC 992.

3.Ordering security against a defendant
An order for security will not ordinarily be made against parties defending themselves and thus forced to litigate: Weily’s Quarries v Devine Shipping Pty Ltd (1994) 14 ACSR 186 at 189. Where, however, the defendant is in fact pursuing a claim as, in substance, the claiming party, the position is reversed: Classic Ceramic Importers Pty Ltd v Ceramica Antiga SA (1994) 12 ACLC 334; Motakov Ltd v Commercial Hardware Suppliers Pty Ltd (1952) 70 WN (NSW) 64.

[2-5990] Dismissal of proceedings for failure to provide
security

The court has been given a new express supplementary power to dismiss proceedings where the plaintiff fails to comply with an order to give security: r 42.21(3): Porter v Gordian Runoff Ltd (No 3) [2005] NSWCA 377 at [36]. Relevant circumstances to be taken into account are discussed in Idoport v National Australia Bank Ltd [2002] NSWCA 271 at [24] ff and [69] ff. See also Lawrence Waterhouse Pty Ltd v Port Stephens Council [2008] NSWCA 235.

[2-6000] Sample orders

1.The plaintiff is to provide security for the defendant’s costs by paying into court the sum of $35,000 or by otherwise providing security for that amount in a manner satisfactory to the defendant. Until that security is provided, there will be a stay of the proceedings. The security is to be provided before 23 June 2007, on which date the matter is to be listed before the court for consequential orders, or, in the event that the security has not been provided, an order for the dismissal of the proceedings under r 42.21(3).

2.All orders currently in place for the case management of the proceedings are presently stayed until the motion seeking security for costs is determined.

3.The first defendant is to provide security on or before 22 June 2007, for the costs of the first defendant and the second defendant up to the end of the first day of the trial, in the amount of $150 000, by way of unconditional bank guarantee, or otherwise to the satisfaction of those defendants.

4.The parties have liberty to apply for additional security for costs at any stage of the proceedings.

Legislation

         Corporations Act 2001 (Cth), s 1335

Rules

         UCPR Pt 42, r 42.21

 

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