By Deren Hassan, Partner & Ella Canty, Law Graduate

It is well known that litigation can be costly. This can be a daunting situation, particularly for a defendant contesting a claim without merit or if there are low prospects of success. A defendant may obtain security for costs where there are reasonable concerns the plaintiff may not be able to pay the costs of the proceedings if the defendant prevails. The court may order the plaintiff to give such security as the court thinks fit and in such manner as the court directs.[1] Security for costs can provide reassurance to a defendant that some of the litigation costs can be recouped if the proceedings are successfully opposed. The court aims to strike a balance between protecting a defendant from wasting costs in defending a hopeless case while not depriving a plaintiff the fundamental right to pursue a claim.

An application for security for costs is usually filed and determined in the early stages of litigation, before the costs of the proceedings substantially accrue. The proceedings may be stayed until the plaintiff provides the security.[2] However, a security for costs order can be oppressive in the sense that it may deny a plaintiff the right to litigate.[3]  The court’s power to order security for costs is discretionary and requires careful consideration of all the relevant circumstances including the plaintiff’s and the defendant’s competing interests.[4] Consideration is given but is not limited to the genuineness of the proceedings, the impecuniosity of the plaintiff and the plaintiff’s prospects of success.[5] The preparation of evidence and submissions in support of and in opposition to a security for costs application in itself can be protracted and costly for the parties.

A security for costs application cannot be used merely as tactic to stifle the litigation. Applying for security for costs does not stop the principal litigation from moving ahead. In a recent interlocutory decision MD Cosmedical on Hyde Parke Pty Ltd v Spruce Australia Pty Ltd (Supreme Court of New South Wales, Registrar Jones, 23 December 2021) (the proceedings), the court found in the Plaintiff’s favour, holding that a security for costs application does not excuse a defendant from filing a defence in accordance with the rules of the court.

In the proceedings a Statement of Claim was served on the Defendant’s former solicitors. The Defendant had twenty-eight days to file a defence[6] failing which the Plaintiff could apply for default judgment[7].  Twenty-seven days later, new solicitors filed an appearance on behalf of the Defendant. Rather than attending to filing a defence, which was due the following day, the Defendant’s solicitors wrote to the Plaintiff’s solicitors foreshadowing an application for security for costs. In correspondence the Defendant’s solicitors advised the Plaintiff’s solicitors that the Defendant did not intend to “…commit to the cost of preparing its defence…” while the issue of security for costs was pending.

In reply, the Plaintiff detailed its opposition to security for costs and asserted that “[a] defendant has no right to suspend its obligation to file a defence because it is considering approaching the Court to seek an order for security for costs”. The Defendant was put on notice that a failure to file a defence will result in the Plaintiff filing a Notice of Motion for default judgment.  Despite this, the Defendant did not file a defence on time.

The Plaintiff proceeded to file a Notice of Motion for default judgment (the Default NOM) after the Defendant’s 28-day filing deadline lapsed. The Defendant subsequently filed a Notice of Motion to set aside the Default NOM (the Set Aside NOM) and a Notice of Motion for security for costs (the Security NOM). The matter came before the Common Law Duty Judge for urgent hearing.

In the course of the urgent hearing, his Honour Justice Beech-Jones criticized the Defendant’s failure to file a defence and questioned how a security for costs application can be determined without knowing what the issues in the case are. The Defendant was unable to provide a satisfactory response to his Honour who stated: “I wouldn’t begin to hear your security for costs application until I knew what the issues were in the case…”. The three NOMs were adjourned to later date before the registrar and an order was made granting the Defendant time to file and serve a defence. If the Defendant failed to put on its defence by the date ordered, leave was given to the Plaintiff to enter default judgment, with costs.

During the adjourned period, the Defendant filed a defence. When the matter came before Registrar Jones, the outstanding issue for determination was the parties’ costs incurred in the Set Aside NOM and the Default NOM.  The Defendant submitted that the Plaintiff should pay their costs on the basis that the Default NOM was a precipitate and unwarranted attempt to avoid addressing reasonable questions about the Plaintiff’s capacity to pay the Defendant’s costs of the proceedings.

The Plaintiff submitted that his Honour recognised the merit of the Plaintiff’s default judgment application but gave the Defendant one final opportunity to defend the claim. Given this, it is entirely fair that the Defendant should pay the Plaintiff’s costs of the Default NOM because payment of these costs should be the price of the Defendant having availed itself of the opportunity to defend the claim, rather than suffering default judgment.

Ultimately, Registrar Jones found that the Plaintiff was not seeking to avoid the security for costs issue by applying for default judgment and that the Plaintiff had in fact entered into “considerable correspondence” on the security for costs issue. The Registrar was persuaded by the Plaintiff’s correspondence that a security for costs application does not excuse a defendant from filing a defence. Accordingly, the Registrar ordered the Defendant to pay the Plaintiff’s costs of both the Set Aside NOM and the Default NOM on the basis that all of the costs could have been avoided had the Defendant simply filed a defence in accordance with the rules. Reiterating Beech-Jones J’s comments, Registrar Jones stated that a security for costs application is not ordinarily considered in the absence of pleadings.

In her reasons for judgment, Registrar Jones noted that this was not a matter in which inexperienced solicitors filed a Default NOM unnecessarily and without warning to the other side, rather it was a reasonable course of action to advance the litigation once it became clear the parties were unlikely to reach an agreement on the security for costs issue through further negotiations.

The decision serves as an important reminder that non-compliance with the civil procedure rules and delay tactics will not be tolerated by the courts. The court was minded not to consider the security for costs application brought by the Defendant because the Defendant had not filed a defence. Without a defence, the court did not know what the issues were in the case. The security for costs application could not be used to unnecessarily deny and prejudice the Plaintiff from progressing the proceedings.

[1]   Regulation (Reg) 42.21(1)(d), Uniform Civil Procedure Rules 2005 (NSW) (UCPR).

[2]   Reg 42.21, UCPR. As a general rule in litigation “costs follow the event”, where at the conclusion of a matter the losing party is ordered by the court to pay the winners legal costs: UCPR Reg 42.1.

[3] KP Cable Investments Pty Limited v Meltglow Pty Limited [1995] FCA 76; Idoport Pty Ltd v National Australia Bank Ltd [2001] NSWSC 744 at [47].

[4] Idoport Pty Ltd v National Australia Bank Ltd [2001] NSWSC 744 at [47]; Meribee Pastoral Industries v Australia and New Zealand Banking Group Ltd (1998) 193 CLR 502.

[5] Reg 42.21(1A), UCPR.

[6] Reg 14.3, UCPR.

[7] Reg16.3(1), UCPR.