The Developer's Litigation Shield - Mastering Security for Costs in Queensland

John Merlo
1 day ago
13 min read

Picture this: a disgruntled contractor initiates legal proceedings against your latest project, claiming substantial damages. After a long and expensive legal battle, the court rules in your favour. It's a victory, but a hollow one. The contractor's company is a shell, has no assets, and enters liquidation shortly after, leaving you with a six-figure legal bill and no way to recover it. This scenario is a developer's nightmare and highlights a critical vulnerability in commercial and construction litigation.

This article introduces your most powerful defence against this risk: a security for costs order. We will frame this legal tool as a "Litigation Shield," a proactive mechanism to ensure that if you win, you don't lose by being unable to recover your costs. This guide is a risk-mitigation playbook for Queensland developers, showing you how to deploy this shield effectively.

Key Takeaways

What It Is: A security for costs order is a court-mandated safeguard requiring a plaintiff to provide funds as security for your potential legal costs if their claim fails.
Primary Trigger: The most common reason to apply is when you have credible reason to believe the plaintiff company (e.g., a builder or subcontractor) will be unable to pay your legal costs if they lose the case.
The Legal Basis: Applications are primarily governed by the Uniform Civil Procedure Rules 1999 (Qld) and Section 1335 of the Corporations Act 2001 (Cth).
The Ultimate Benefit: It acts as a financial shield, protecting you from the risk of winning a lawsuit but being left with unrecoverable legal fees due to the plaintiff's insolvency.

What is a Security for Costs Order? Your Financial Shield Explained

In the high-stakes world of property development, managing litigation risk is paramount. A security for costs order is a critical procedural tool that provides essential developer protection. It is a court order that requires a plaintiff (the party bringing the lawsuit) to provide security—usually in the form of money paid into court or a bank guarantee—for the defendant's (your) future legal costs.

This security can then be accessed by you if you successfully defend the claim and the plaintiff fails to pay the costs order made in your favour. The process is governed by Queensland's UCPR (Uniform Civil Procedure Rules).

What Does "Security for Costs" Actually Mean?

It's crucial to understand that a security for costs order is not about the merits of the case itself. The court isn't making a premature judgment on who is right or wrong. Instead, the focus is entirely on the plaintiff's financial capacity to meet a potential adverse costs order if they lose. The order compels a plaintiff to put money aside that is ring-fenced for the specific purpose of paying your legal fees if their case is unsuccessful.

This is a protective, not a punitive, measure. It is designed to level the playing field and ensure fairness in the litigation process, preventing a situation where a defendant is forced to incur significant legal expenses to defend a claim with no realistic prospect of recovering those costs from an insolvent plaintiff.

The Purpose: Preventing a Hollow Victory

Winning a case can feel exactly like losing if the legal costs you incurred are irrecoverable. Litigation is expensive, and a successful defence of a complex construction claim can easily result in a significant financial loss for the developer if the plaintiff company is a 'two-dollar company' with no assets. The justice system provides this mechanism to prevent plaintiffs without financial substance from using litigation as a tool of commercial pressure or as a gamble, knowing they have nothing to lose.

By securing potential costs upfront, the order ensures that a plaintiff has "skin in the game" and forces them to seriously consider the strength of their case before proceeding. This is a key part of managing complex litigation matters.

How is This Different from a Freezing Order or Injunction?

It's easy to confuse these powerful legal orders, but they serve distinct functions.

Security for Costs Order: This is specifically about future legal costs of the proceeding itself. It secures an amount to cover the fees you will incur in defending the case from that point forward.
Freezing Order (Mareva Injunction): This is a much more drastic measure designed to prevent a party from dissipating its assets to frustrate a potential final judgment. It freezes assets like bank accounts or property to ensure there is something left to satisfy the judgment if the plaintiff wins the overall case.
Injunction: This is a broader type of order that compels a party to do a specific act (a mandatory injunction) or restrains them from doing a specific act (a prohibitory injunction), such as stopping unlawful work on a neighbouring property.

Each order has a different purpose, and a security for costs order is the specific shield designed to protect you from the financial fallout of a plaintiff's inability to pay your legal fees.

When Can You Raise the Shield? Key Triggers for an Application

Knowing when to apply for security for costs is a strategic decision that can significantly mitigate financial risk. The grounds are clearly set out in legislation, with the most common trigger being evidence of plaintiff insolvency. Given the high rate of construction insolvencies in Queensland, developers must be aware of these triggers. The primary legal bases are Section 1335 of the Corporations Act and Rule 671 of the UCPR.

The Primary Trigger: A Financially Unstable Plaintiff

Warning: The rising rate of builder insolvencies is the single biggest reason for developers to be vigilant. ASIC data shows construction firm administrations rose from 2,546 in 2023 to 3,217 in 2024, and that construction insolvencies represented 27% of all corporate insolvencies in the 2023-24 financial year.

These numbers mean there is a statistically significant risk that a plaintiff company in the construction sector may not be able to satisfy a costs order, making a security for costs application a prudent commercial decision. This is especially relevant in the context of payment disputes under the BIF Act.

Grounds Under the Corporations Act 2001

Section 1335 of the Corporations Act 2001 (Cth) is the most powerful and commonly used provision for developers facing litigation from a corporate entity.

The application is straightforward and relies on two key elements:

The plaintiff is a corporation (e.g., a Pty Ltd company).
There is "reason to believe" that the corporation will be unable to pay the defendant's costs if ordered to do so.

"Reason to believe" is more than a mere hunch. It must be based on credible evidence. This could include publicly available financial documents showing consistent losses, evidence of default notices from other creditors, an ASIC search showing the company has minimal paid-up capital, or evidence that the plaintiff is a 'special purpose vehicle' (SPV) created for a single project with no other tangible assets.

Grounds Under Queensland's Uniform Civil Procedure Rules

Rule 671 of the Uniform Civil Procedure Rules 1999 (Qld) provides additional grounds that can be used, particularly when the plaintiff is an individual rather than a corporation.

The most relevant grounds for a developer include situations where:

The plaintiff is ordinarily resident outside Australia.
The plaintiff is an individual who is suing not for their own benefit, but for the benefit of another person or entity (and there is reason to believe they cannot pay).
The plaintiff has a history of failing to comply with court orders.
The plaintiff's address is not stated or is misstated in the originating process, likely to avoid the consequences of the litigation.

The Developer's Playbook: How to Apply for Security for Costs

Successfully obtaining a security for costs order requires a methodical approach and a well-prepared court application. This is a formal legal procedure that demands strong affidavit evidence and expert legal argument. It is a key risk mitigation tactic that should be handled by an experienced dispute lawyer.

Step 1: Gathering Your Evidence

The first step is to compile compelling evidence of the plaintiff's financial instability. This involves instructing your specialist building and construction lawyer to undertake thorough due diligence.

This process typically includes conducting company and credit searches (e.g., through ASIC and credit reporting agencies), gathering any public statements, annual reports, or news articles about the plaintiff's financial troubles, and collating any correspondence that points to their inability to pay debts.

This evidence is then organised and presented in a sworn affidavit. It is critical that this evidence establishes more than mere suspicion; it must provide the court with a credible and objective "reason to believe" in the plaintiff's inability to pay a future costs order.

Step 2: Filing the Application and Affidavit

Once the evidence is gathered, the next practical step is drafting and filing the formal application with the court (e.g., the District or Supreme Court in Brisbane). This application is a specific legal document that will state the grounds you are relying on (e.g., s 1335 of the Corporations Act) and the amount of security you are seeking. It must be supported by the detailed affidavit containing all the evidence you have gathered.

This is a critical legal document that must be prepared with precision, as any errors or omissions can weaken your position.

Step 3: The Court Hearing

After filing, the matter will be set down for a court hearing. During this hearing, your legal team will present the arguments and evidence outlined in your application and affidavit. The plaintiff will have an opportunity to rebut your claims. They might, for example, provide their own evidence, such as recent financial records or a letter from their accountant, to try and prove their solvency.

The judge or magistrate will hear both sides, consider the evidence, and weigh the competing interests before exercising their discretion to either grant or refuse the order for security. For these critical steps, it is vital to Speak with an experienced dispute lawyer.

What Will the Court Consider? The Judicial Discretion Test

Obtaining an order for security for costs is not an automatic tick-box exercise. The court exercises a broad, unfettered judicial discretion. This means the judge will weigh a range of factors to determine what is fair and just in the circumstances. The decision hinges on a careful balancing act, considering the merits of the case, the risk of stultification of a bona fide claim, and other relevant court considerations.

The Court's Balancing Act

The central tension the court must resolve is the defendant's right to be protected from irrecoverable costs versus the plaintiff's fundamental right to access justice. On one hand, it is unjust to force a developer to spend hundreds of thousands of dollars defending a claim brought by a plaintiff who has no means of paying costs if they lose.

On the other hand, the courts are wary of allowing a security for costs order to become a weapon for a wealthy defendant to shut down a legitimate claim from an impoverished but deserving plaintiff. The court's ultimate goal is to ensure that justice is served for both parties, a principle upheld by professional bodies like the Queensland Law Society.

Will the Application Stifle a Genuine Claim?

Expert Insight by John Merlo: The court will be very reluctant to make an order if it would unfairly prevent a plaintiff with a genuine case from proceeding simply because they are impoverished. This is known as "stultification" or "oppression." A key point here is that the plaintiff bears the onus of proving that a security for costs order would indeed stultify their claim. They can't just say they can't afford it; they must provide clear evidence of their financial position and demonstrate that they have been unable to secure funding from any other source (such as shareholders, directors, or litigation funders).

While QCAT is primarily a "no costs" jurisdiction under section 100 of the Queensland Civil and Administrative Tribunal Act 2009—meaning parties generally bear their own costs—the Tribunal can award costs under section 102 where "the interests of justice require it." Given this exception, security for costs applications can be made in QCAT under section 109 of the QCAT Act, though they are rarely granted due to the tribunal's statutory mandate to be an accessible, low-cost jurisdiction. This stultification consideration is therefore a key factor in both QCAT matters (where costs orders are already exceptional) and in the higher courts.

The Strength and Merits of the Plaintiff's Case

A preliminary assessment of the case's merits is often an unavoidable part of the court's consideration. If a plaintiff's case appears weak, speculative, or has a low probability of success, a court is more likely to grant security to protect the defendant from being put to the expense of defending a frivolous or unmeritorious claim.

While the court will not conduct a mini-trial of the entire dispute during the security for costs application, it will look for evidence that the claim is bona fide and has some substance. A claim that is poorly pleaded or appears to lack a solid legal or factual basis will weigh in the developer's favour.

Other Factors in Play

The court may also consider a range of other factors in exercising its discretion.

These can include:

Causation: Was the plaintiff's impecuniosity or lack of funds caused by the defendant's own actions that are the subject of the dispute? If so, the court may be less inclined to grant security.
Delay: Has the defendant delayed in bringing the application for security? An application made late in the proceedings, after significant costs have already been incurred, may be viewed less favourably than one made promptly.
Public Interest: Is there a matter of public interest involved in the litigation that might weigh against ordering security?

This holistic assessment provides a complete view of the legal environment, which is shaped by the broader Queensland's building and construction law landscape.

What Happens if the Plaintiff Fails to Provide Security?

Obtaining the order is only half the battle. The real power of the "Litigation Shield" is realised when the plaintiff is unable to comply. The consequences of non-compliance are severe and can lead to a stay of proceedings or even outright dismissal, dramatically altering the litigation outcome.

The Immediate Consequence: A Stay of Proceedings

If a court orders security and the plaintiff fails to provide it by the specified deadline, the legal proceeding is typically "stayed." A stay is a court order that halts the case in its tracks. In practice, this means the case is paused, and the plaintiff is legally barred from taking any further steps to advance their claim against you. They cannot file further documents, request disclosure, or set the matter down for trial until the security is provided.

This immediately stops the clock on your legal costs and places the onus squarely back on the plaintiff to fund the security if they wish to continue.

Can the Case Be Dismissed Entirely?

Illustrative Example: Developer Corp, a Brisbane-based developer, obtains a security for costs order for $75,000 against Risky Builder Pty Ltd, a subcontractor who has filed a claim for variations. The court gives Risky Builder 28 days to pay the funds into court. The deadline passes, and Risky Builder fails to pay. After a further period of non-compliance, Developer Corp's lawyers apply back to the court for the case to be dismissed. The court, seeing no prospect of the security being paid and no reasonable explanation for the delay, dismisses Risky Builder's claim entirely for want of prosecution.

The lesson is that sustained non-compliance can be a fatal blow to the plaintiff's case, providing the developer with a final, cost-effective resolution. This is a much better outcome than being stuck in a protracted legal battle after terminating a construction contract and facing an un-funded lawsuit.

Proactively Managing Litigation Risk in Property Development

For savvy developers, risk management is not a reactive process but a core part of their developer strategy. A security for costs application should be viewed as a key tool in this strategy, requiring proactive legal advice and careful planning from the outset of any dispute. Firms like Merlo Law advocate for integrating this thinking into standard protocols.

Integrating Security for Costs into Your Strategy

Thinking about security for costs should be part of a developer's standard risk management protocol, not an afterthought when legal bills are already mounting. Early applications are viewed more favourably by the courts and can save significant costs in the long run by weeding out unmeritorious or unfunded claims before they gather momentum.

As soon as a developer receives a letter of demand or a formal claim from a financially questionable entity—be it a builder, subcontractor, or consultant—they should be discussing the viability of a security for costs application with their legal team. This proactive stance sends a clear message that you will not be a target for speculative litigation.

The Importance of Expert Legal Guidance

Navigating the requirements of complex legislation like the Queensland Building and Construction Commission Act 1991 (which now incorporates domestic building contract provisions following the repeal of the Domestic Building Contracts Act 2000 in 2015) is challenging, and the same is true for the procedural law surrounding security for costs. Success depends on strong evidence, a deep understanding of the court's discretionary factors, and persuasive legal argument.

Partnering with a firm that has deep experience in construction disputes is the most effective way to deploy the "Litigation Shield" and protect your projects from the financial drain of defending claims brought by insolvent plaintiffs. This is the core of Merlo Law's expertise. For more insights into managing legal risks in the construction industry, please see our publications.

Conclusion

In the volatile landscape of Queensland's construction industry, a hollow victory is a financial loss. A security for costs order is more than just a procedural step; it is a developer's litigation shield. It protects your projects from being drained by the costs of defending claims from financially unstable plaintiffs, ensuring that if you win, you don't lose.

By understanding the triggers, mastering the application process, and integrating this tool into your core risk management strategy, you can fortify your developments against speculative litigation and safeguard your bottom line.

FAQs

How much security can a court order?

The amount of security ordered is at the court's discretion. It is typically calculated to cover the defendant's likely legal costs from the date of the order up to a certain stage of the proceedings, often the end of the trial. Your lawyer will prepare a detailed estimate of future costs, supported by evidence, for the court to consider

Can an individual plaintiff be ordered to provide security for costs?

Yes, but the grounds are different and generally narrower than for a corporation. Under Rule 671 of the UCPR, an individual can be ordered to provide security if, for example, they are ordinarily resident outside Australia, are suing for the benefit of another, or have a history of disobeying court orders. Proving simple impecuniosity is generally not enough for an individual plaintiff.

What if the plaintiff is funded by a litigation funder?

The presence of a litigation funder can complicate matters. While the funder is not a party to the proceedings, courts are increasingly willing to look behind the corporate veil. A court may still order security if there is doubt about the funder's ability or willingness to cover an adverse costs order. The terms of the litigation funding agreement can become a key piece of evidence.

Does applying for security for costs make me look weak or worried about the case?

Not at all. In the commercial and construction litigation sphere, it is viewed as a prudent and commercially sensible step. It demonstrates that you are a sophisticated litigant actively managing your financial risk. It is a strategic move, not a sign of weakness in your defence.

Can a security for costs order be made in QCAT?

Yes. Section 109 of the Queensland Civil and Administrative Tribunal Act 2009 (Qld) gives QCAT the power to order a party to give security for the applicant's costs and to stay the proceeding until security is provided.

If security is not given within the specified period, QCAT may dismiss the proceeding under section 109(3). However, such orders are rarely granted in practice. This is because QCAT operates as a predominantly "no costs" jurisdiction under section 100 of the QCAT Act, where parties generally bear their own costs. Costs can only be awarded under section 102 where "the interests of justice require it." When deciding whether to order security, QCAT considers factors including the parties' financial circumstances, the merits of the case, and the genuineness of the proceeding.

The threshold for obtaining security in QCAT is arguably considerably higher than in the higher courts due to the tribunal's statutory mandate to be an accessible and low-cost forum.

What is the best time to make an application for security for costs?

The best time is as early as possible in the proceedings, typically after the plaintiff has filed their initial claim and statement of claim, and you have filed a defence. Delaying the application can be a factor that weighs against you, as the court may be reluctant to grant security for costs that have already been incurred.

This guide is for informational purposes only and does not constitute legal advice. For advice tailored to your specific circumstances, please contact Merlo Law.