For a corporate defendant, the conduct of civil litigation imposes many burdens especially the costs incurred in meeting the case brought against it. The recent decision of the High Court in Jeffery & Katauskas Pty Ltd v Rickard Constructions Pty Ltd[1] (Jeffery) is a reminder that “there are cases where successful defence of an action will come at a considerable cost to the defendant”.[2]
The issue is brought into sharp relief where an impecunious plaintiff has the assistance of a litigation funder. Litigation funding is a contractual arrangement where the funder agrees to pay the cost of the litigation and in return, if the case succeeds, receives a percentage of the proceeds.[3] Although litigation funding is said to promote access to justice and efficiency of litigation,[4] a defendant can be left exposed if a funder can reap the benefits of the litigation “without assuming one of the central risks ordinarily attending litigation: the risk of having to meet an adverse costs order”[5] where the plaintiff’s case is rejected by the courts.
The High Court’s decision in Jeffery precludes a defendant from seeking a costs order against the funder under the NSW rules of court where the funder has not indemnified the plaintiff against the defendant’s costs. However, the decision makes reference to the “need to revisit... the principles governing security for costs”[6] to address this asymmetry in the way the risks and burdens of litigation are borne.
Background
Jeffery & Katauskas Pty Ltd (Defendant) had initially obtained orders for security for costs of the trial, as to $47,750 by order of Rolfe J on 15 December 2000 and as to $140,000 by order of the trial judge McDougall J made on 6 October 2004, the day after the commencement of what became a 19-day trial. However, the Defendant faced a shortfall between its costs of the trial and the security provided. Although the Defendant was successful, it was unable to recover its costs and was left out of pocket in excess of $450,000.[7]
To recover the shortfall, the Defendant argued that a costs award could be made against the litigation funder pursuant to the general statutory discretion under section 98 of the Civil Procedure Act 2005 (NSW) (CPA) to order costs and r 42.3 of the Uniform Civil Procedure Rules 2005 (NSW) (UCPR) which provides specified circumstances in which costs may be ordered against non-parties. The Defendant argued that there was an abuse of process where a “non-party” litigation funder bankrolled litigation brought by an insolvent plaintiff but without providing the plaintiff with an indemnity against cost orders in favour of a successful defendant.[8] However, the High Court found there was no abuse of process and that the NSW Supreme Court did not have the power to make a costs order against the litigation funder in such circumstances.[9]
The majority suggested that the Defendant could have prevented the shortfall and protected its interests by relying upon the “provisions and principles that govern security for costs”.[10] Security for costs is a potential method of preventing defendants from being out of pocket in funded litigation.
Relevant principles for security for costs
What is the rationale of security for costs?
The purpose of a security for costs order is to protect the defendant’s entitlement to recover legal costs from an unsuccessful plaintiff consistently with the general rule that “costs follow the event”.[11] This rule means that a successful party receives costs as determined by the courts in the absence of special circumstances to depart from that entitlement. Security for costs ensures that the orders of the court as to costs are not frustrated.[12]
Discretion to order security for costs
The courts have a broad and unfettered discretion to order security for costs. The question arises whether it would be appropriate to exercise the broad discretion in circumstances where there are persons who stand behind an impecunious or insolvent plaintiff and whose primary objective is to take the benefit from the success of the litigation without assuming the attendant risks and burdens (including, in particular, a potential adverse costs order).[13]
There are several guiding principles which inform the exercise of the broad discretion.[14]
The discretion should be exercised judiciously without any predisposition in favour of the award of security, having due regard and attributing weight to all relevant circumstances according to their intrinsic persuasiveness and the impact of other circumstances to be weighed.
Poverty will not prevent a person from litigating to secure their legal rights, but a corporate plaintiff may need to render security for costs.
Applications should be brought promptly.
The strength and bona fides of the plaintiff’s case are relevant considerations.
Security for costs should be ordered against a party who is in substance a plaintiff, and not against parties who are defending themselves and thus forced to litigate.
In the case of an impecunious plaintiff, whether the impecuniosity was caused by the defendant’s conduct the subject of the claim.
If the defendant’s application for security is oppressive, in the sense that it is being used merely to deny an impecunious plaintiff a right to litigate, the plaintiff could argue against a security for costs order. However, the mere fact that the ordering of security will frustrate the plaintiff’s rights to litigate because of its financial condition does not automatically lead to the refusal of security.
Whether there are any persons standing behind the company who are likely to benefit from the litigation and who are willing to provide the necessary security. For example, a plaintiff company in liquidation against whom an order for security for costs is sought must prove that it cannot fund the litigation from either its own resources or other resources available to it such as its shareholders or creditors.
Whether persons standing behind the plaintiff company have offered any personal undertakings to meet the plaintiff’s liability for an adverse costs order.
The nexus between the litigation funder and security for costs
These general guiding propositions in conjunction with the rules of court and section 1335(1) of the Corporations Act point to the possibility of exercising the broad discretion in favour of the defendant in circumstances where the litigation involves an impecunious or insolvent corporate plaintiff and is financed by a funder who has a commercial interest in the fruits of that litigation without any responsibility by way of an indemnity for the plaintiff’s liability for the defendant’s costs. Judicial support for this possibility is to be found in Green v CGU where Hodgson JA focused on matters of legal policy:
"… a court should be readier to order security for costs where the non-party who stands to benefit from the proceedings is not a person interested in having rights vindicated, as would be a shareholder or creditor of a plaintiff corporation, but rather is a person whose interest is solely to make a commercial profit from funding the litigation. Although litigation funding is not against public policy, the court system is primarily there to enable rights to be vindicated rather than commercial profits to be made; and in my opinion, courts should be particularly concerned that persons whose involvement in litigation is purely for commercial profit should not avoid responsibility for costs if the litigation fails."[15]
Reward and risk should be aligned. If the funder makes the litigation possible and they stand to benefit from a successful outcome then they should be liable for the consequences of an unsuccessful outcome — an adverse costs order. Failure to enforce this norm in relation to litigation funding means there is no deterrence to unmeritorious litigation.[16]
Security for costs in these circumstances provides a way of preventing a situation where:
"you … have no choice about whether to play this game; we are going to provide the means to start and continue it; if our side wins, you pay us; but if you win we will not pay you."[17]
Vindication of a defendant would only be a pyrrhic victory if the plaintiff could not pay the defendant’s costs, especially through its litigation funder.
Quantum of security
In practice, determining the appropriate amount of the security will be critical to any application for a security for costs order. The relevant provisions in the various rules of court are couched in general language, giving the courts a wide discretion to order security in such manner and form and on such terms as the courts direct.[18] The rules of court do not provide any guidance as to how much security or how the amount should be assessed. Allied to the broad discretion to grant a security for costs order, is a discretion to order “such sum as the court thinks just, having regard to all the circumstances of the case”.[19]
A proper exercise of the court’s discretion should consider the likely costs which the defendant will incur so far as it can be ascertained to ensure the security is neither too much nor too little.[20] Generally, courts have adopted a conservative approach by emphasising that the amount of the security is not intended to be a pre-estimate or a complete indemnity of the actual amount of the costs recoverable by a successful defendant.[21] However, the discretion remains unfettered and each case depends on its own facts whereby the defendant bears the onus of providing the court with as much helpful and predictive information at the earliest opportunity, including a well explained estimate of future costs that may be reasonably incurred that takes into account the number, nature and prospects of the issues in dispute.[22]
It may not be reasonable for a defendant to make further applications to the court at every stage when it appears that costs are escalating so as to increase the amount of security already ordered.[23] Instead, it may be preferable to ask the court to craft the security for costs order so that security is provided in tranches or instalments as and when each litigation milestone is achieved. However, in some jurisdictions the court may increase the amount of security ordered or may set aside or vary the security for costs order.[24] Given the rationale of security for costs, courts would be generally reluctant to exercise the discretion to allow a succession of “top ups” without good cause.
Ramifications
The High Court’s decision sends a clear message to defendants not to underestimate the importance of ascertaining early on in the proceedings whether a security for costs order is necessary so as to avoid being out of pocket at the end of the proceedings. Defendants should consider the following steps in consultation with their legal advisers:
Carry out due diligence and other reasonable enquiries about the financial position of the plaintiff, checking whether the plaintiff is impecunious, insolvent or there is reason to believe that the plaintiff will be unable to pay the costs of the defendant if ordered to do so.
Assess the likely litigation costs with the assistance of an expert costs consultant;
Request the plaintiff to provide security for the defendant’s costs.
If the plaintiff refuses to provide security, apply to the court for security for costs.
Provided that the discretionary factors can be readily explained to the court, the amount of the security must be determined as accurately as possible despite the inherent contingencies of estimating all reasonable future costs of the proceedings. The security will only be as effective as its quantification.
The authors wish to thank Deborah Vine-Hall of DSA Legal Cost Consultants for her comments on an earlier draft.
This article was first published in Inhouse Counsel, Vol 13 No 3, December 2009/January 2010
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[1] Jeffery & Katauskas Pty Ltd v Rickard Constructions Pty Ltd (2009) 260 ALR 34; 83 ALJR 1180; [2009] HCA 43 [back]
[2] Jeffery at [39]. [back]
[3] For example see Keelhall Pty Ltd t/as “Foodtown Dalmeny” v IGA Distribution Pty Ltd (2003) 54 ATR 75; [2003] NSWSC 816 at [3]; In the matter of ACN 076 673 875 Ltd (2002) 42 ACSR 296; 20 ACLC 1551; [2002] NSWSC 578 at [9]; QPSX Ltd v Ericsson Australia Pty Ltd (No 3) (2005) 219 ALR 1; 66 IPR 277; [2005] FCA 933 at [39]–[48] and P Dawson Nominees Pty Ltd v Multiplex Ltd (2007) 242 ALR 111; 25 ACLC 1192; [2007] FCA 1061 at [31]–[33]. [back]
[4] QPSX Ltd v Ericsson Australia Pty Ltd (No 3) (2005) 219 ALR 1; 66 IPR 277; [2005] FCA 933 at [54] and Fostif Pty Ltd v Campbells Cash & Carry Pty Ltd (2005) 63 NSWLR 203 at 226; 218 ALR 166; [2005] NSWCA 83. [back]
[5] Jeffery at [40]. [back]
[6] Jeffery at [39]. [back]
[7] Jeffery at [10]–[11]. [back]
[8] Jeffery at [17]. [back]
[9] Jeffery at [29]–[30], [43]. The NSW and ACT rules of court prohibit costs orders against a non-party except in specified circumstances (Uniform Civil Procedure Rules 2005 (NSW)) (UCPR) r 42.3; Court Procedures Rules 2006 (ACT) r 1703). In other States and Territories, although the courts have jurisdiction to make costs orders against non-parties, the courts will only exercise the discretion to make a non-party costs order sparingly where the interests of justice justify a departure from the general rule that only parties to proceedings may be subject to costs orders (see G E Dal Pont, Law of Costs, 2nd edition, 2009, [22.6]–[22.8], [22.16]–[22.54]). [back]
[10] Jeffery at [38]–[40]. [back]
[11] Idoport v National Australia Bank (No 35) [2001] NSWSC 744 at [33] and [52]; G E Dal Pont, Law of Costs, 2nd edition, 2009, [28.3]. [back]
[12] G E Dal Pont, Law of Costs, 2nd edition, 2009, [28.2]. [back]
[13] See Green (as liquidator of Arimco Mining Pty Ltd) v CGU Insurance Ltd (2008) 67 ACSR 105; [2008] NSWCA 148 (Green v CGU) and Fiduciary Ltd v Morningstar Research Pty Ltd (2004) 208 ALR 564; [2004] NSWSC 664. [back]
[14] KP Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 56 FCR 189 at 196-198; 13 ACLC 437; Jazabas Pty Ltd v Haddad (2007) 65 ACSR 276; [2007] NSWCA 291 at [9]–[10], [74], [77]–[80]; Green v CGU at [37]–[39]; G E Dal Pont, Law of Costs, 2nd edition, 2009, [29.5], [29.9]–[29.10], [29.13]. See also Federal Court of Australia Act 1976 (Cth) section 56 and Federal Court Rules O 28 r 3, 5(1); Corporations Act 2001 (Cth) section 1335(1); UCPR r 42.21(1); Uniform Civil Procedure Rules 1999 (Qld) r 671, 674; Supreme Court Civil Rules 2006 (SA) Pt 14 r 194; Supreme Court Rules 2000 (Tas) r 828(1); Supreme Court (General Civil Procedure) Rules 2005 (Vic) r 62.02(1). [back]
[15] Green v CGU at [51]. See also ibid at [88] per Campbell JA. [back]
[16] Michael Legg, Security for costs the solution to litigation funding, The Australian Financial Review, 13 November 2009, p 42. [back]
[17] Jeffery at [113]. [back]
[18] See Federal Court of Australia Act 1976 (Cth) section 56(2) and Federal Court Rules Order 28 r 4; Uniform Civil Procedure Rules 2005 (NSW) r 42.21(2); Uniform Civil Procedure Rules 1999 (QLD) r 673(1); Supreme Court Civil Rules 2006 (SA) Pt 14 r 194; Supreme Court Rules 2000 (Tas) r 829(1); Supreme Court (General Civil Procedure) Rules 2005 (VIC) r 62.03. [back]
[19] G E Dal Pont, Law of Costs, 2nd edition, 2009, [28.32]. The reference in section 1335(1) to “sufficient security” does not limit this discretion to set the amount. [back]
[20] G E Dal Pont, Law of Costs, 2nd edition, 2009, [28.32]–[28.33]. [back]
[21] G E Dal Pont, Law of Costs, 2nd edition, 2009, [28.34]. [back]
[22] Note section 60 of the Civil Procedure Act 2005 (NSW) states the “cost to the parties is proportionate to the importance and complexity of the subject-matter in dispute”. [back]
[23] Jeffery at [93]. [back]
[24] Federal Court of Australia Act 1976 (Cth) section 56(3) and Federal Court Rules O 28 r 5(2); Uniform Civil Procedure Rules 1999 (QLD) r 772(4); Supreme Court (General Civil Procedure) Rules 2005 (VIC) r 62.05. [back]