Varying security for costs orders - how secure is your security?
Oct 2015 |
Introduction
An order for security for costs is never made lightly by the courts, notwithstanding that they have a broad discretion to do so. That discretion extends to an application to vary a security for costs order already in place. The recent case of Austcorp Project No. 20 Pty Limited v The Trust Co (PTAL) Limited, in the matter of Bellpac Pty Limited (Receivers and Managers Appointed) (in liq) (No 4) [2015] FCA 850, highlights the issues to be considered when seeking to vary a security for costs order.
Background
Substantive proceedings
For a detailed examination of the facts and circumstances surrounding the substantive proceedings, please see the July 2014 newsletter ‘When is a claim not a ‘Claim’? The Federal Court says when it’s a defence’.1
Security for costs application
The defendants originally filed applications for security for costs against the plaintiffs in December 2014. Not unexpectedly, the plaintiffs opposed the applications. Having regard to relevant issues, including the impecuniosity of the plaintiffs and the absence of credible evidence that the plaintiffs’ impecuniosity was caused by the conduct of the relevant defendants, the court was satisfied that this was an appropriate case in which to order security for costs, and made orders in favour of a number of defendants, including Trust Co (PTAL) Ltd (PTAL).2 Pending payment of the security, the proceedings were stayed.
Having made no payment to any defendant, the plaintiffs issued an application to vary the security for costs order in July 2015. That application was opposed by PTAL.3 Specifically the plaintiffs sought to pay security to PTAL by instalments rather than lump sum, primarily on the basis that the plaintiffs were no longer funded by a litigation funder (LCM).
The court was required to consider two issues:
- Whether it should vary the security for costs order so that payment could be made by way of instalments rather than in a lump sum; and
- If the plaintiffs were unsuccessful with varying the security for costs order, whether the proceedings should be summarily dismissed immediately or whether the plaintiffs should be afforded one last opportunity to comply.
Application to vary security for costs order
Legal framework
In Federal Court proceedings, the power to vary an order for security for costs is found in s 56(3) of the Federal Court of Australia Act 1976 (Cth), and rules 1.32 and 39.05 of the Federal Court Rules 2011 (Cth). The power is discretionary and will only be used in appropriate circumstances.
In considering whether to exercise that power, the court referred to Hely J’s comments in Truth About Motorways Pty Ltd v Macquarie Infrastructure Investment Management Ltd,4 that:
‘[i]t is clear from the terms of [the predecessor provision to s 56(3) of the Federal Court of Australia Act 1976 (Cth)] that the Court has power to set aside or vary the original security for costs order. The Court retains jurisdiction, because of the very nature of an interlocutory order, to set aside, vary or discharge it up to the time of the final disposition of the proceedings. However, as McLelland J recognised in Brimaud v Honeysett Instant Print Pty Ltd(1988) 6 ACLC 942, it would be conducive to great injustice and enormous waste of judicial time and resources if there were no limit on the power of a party to have any interlocutory application or order relitigated at will. Hence the ordinary practice is that an application to set aside, vary or discharge an order of a substantive nature made after a contested hearing in contemplation that it would operate until a final disposition of the proceedings, must be founded on a material change of circumstances since the original application was heard, or the discovery of new material which could not reasonably have been put before the Court on the hearing of the original application.’
The above principle followed from the decision in Darling Harbourside (Sydney) Pty Ltd v Sanirise Pty Ltd5 where the Full Federal Court set aside an order varying an order for the provision of security on the basis that there had been no material change in circumstances established so as to warrant the variation.
The court also gave a number of examples of what might constitute a material change of circumstances, including a significant material improvement to the plaintiff’s financial situation arising from an agreement with a litigation funder.6
Decision
While the court accepted that there had been a material change of circumstances - LCM was no longer funding the plaintiffs - it considered that was a factor relevant to its decision whether security for costs should be ordered, rather than a matter going to the precise terms of the security to be given. His Honour noted that the plaintiffs did not suggest that security for costs should not be given, nor would he have concluded that the loss of funding by LCM meant that security for costs was no longer warranted.
The plaintiffs also argued that they had new evidence relevant to their prospects of success in the substantive proceedings which was not available when the security for costs order was made and which should now be considered by the court. However his Honour considered that:
‘[t]he discovery of new evidence improving the plaintiffs’ prospects of success is not a relevant matter. The security for costs application was made on the basis that the claim is bona fide with a reasonable prospect of success, and the particular strength of the plaintiffs’ case was not a matter which affected the exercise of the discretion to order security for costs, let alone the question of the precise form of the orders.’
The court ultimately found that there was no evidence that the proposed variation to the security for costs order would stifle the litigation. On the contrary, his Honour considered that there was a risk that the plaintiffs’ proposed orders would be less efficient than the current orders as a result of further interlocutory disputes in the event that a payment was not made, or not made on time.
The plaintiffs’ application to vary the security for costs order was therefore dismissed with costs. As the plaintiff had not provided security, the Court had to consider the defendants’ application for summary dismissal.
Application for summary dismissal
The court noted that ordering summary dismissal requires a balancing act between the interests of both parties, that is to say:
‘[t]he Court is careful to see that orders for security for costs do not work injustice to parties against whom such orders are made, but if those parties do not comply with the orders and give no evidence or explanation as to why they have not complied with them, they cannot be heard to complain of injustice if, after a considerable length of time, and extensions of time, the ultimate sanction of dismissal is applied.’7
Citing Idoport Pty Ltd v National Australia Bank,8 the court identified that when deciding whether to exercise its discretion to dismiss the proceedings where there has been a failure to comply with an order for security, the following factors are relevant:
- The period of time that has elapsed since security was ordered;
- That the plaintiff has been on notice of the application for dismissal;
- The seeming inability of the plaintiff to further fund the main proceedings;
- The prejudice to the defendants; and
- The position of the court.
The plaintiffs themselves did not dispute their inability to fund the proceedings, which placed the defendants at risk of being unable to recover their costs.
While the court found that there was cause for summary dismissal, it considered that the dismissal ‘would be disastrous for the plaintiffs’ and therefore allowed a further month to provide the security.
Implications
An order for security for costs can often be an important tool in a defendant’s and its insurer’s armoury in the course of defending litigation. Obtaining an order for security is never certain (and usually costly) and therefore it is often only used as method of last resort in limited circumstances, such as where a plaintiff has no reasonable prospects of success and the costs of the litigation far exceed the plaintiff’s ability to meet an adverse costs order. As was acknowledged by the court, once successful a defendant should not be exposed to further interlocutory skirmishes about the method by which security should be paid.
The court’s discretion to make security for costs orders and subsequent variations is broad. However defendants and their insurers should take comfort from this decision which reinforces that once an order for security is made, ordinarily it will operate until a final disposition of the proceedings unless there is some relevant material change of circumstances beyond fresh evidence of prospects. It should also be a timely reminder to plaintiffs of the significant hurdles which have to be overcome in seeking to vary a security for costs order.
----------
1 http://www.carternewell.com/page/Publications/2014/When_is_a_claim_not_a_Claim__The_Federal_Court_says_when_its_a_defence. See also Austcorp Project Number 20 Pty Ltd v LM Investment Management Ltd [2014] FCA 1371 [3]-[7].
2 First defendant ($150,000), second defendant ($150,000), third defendant ($150,000) and fifth, sixth and seventh defendants ($100,000). See Austcorp Project Number 20 Pty Ltd v LM Investment Management Ltd (in liq) [2014] FCA 1371.
3 The defendants previously foreshadowed a summary dismissal application in May 2015 as a result of the plaintiffs’ non-compliance with security for costs order. PTAL and the third defendant subsequently issued applications for summary dismissal on 24 and 25 June respectively. Proceedings were discontinued against the first, fifth, sixth and seventh defendants on 13 and 14 July respectively.
4 [2001] FCA 1603 [11].
5 Unreported, Beaumont, Carr, Sackville JJ, 17 May 1996.
6 Bakers Investment Group (Australia) Pty Ltd v Caason Investments Pty Ltd [2014] VSC 154.
7 Microbio Resources Inc v Betaten Ltd (unreported, Black CJ, Sheppard and Einfeld JJ, 8 October 1993).
8 [2002] NSWSC 271 [24].
