Security for costs – now available for order against third parties

Oct 2019 | Insurance

In the usual course of litigation, 'costs follow the event', meaning that upon a determination, payment of the successful party’s costs are ordered against the unsuccessful party. However where there is a question as to whether a party can meet an adverse costs order, security for costs may be awarded.

Security for costs is a measure designed to ensure justice – that a party being sued should not be forced to incur costs in defending itself if the claimant does not have the means to pay any costs order if the claim is unsuccessful. In such situations, where an order for security for costs is made, the security is held by the Court pending determination of the proceedings or the proceedings are stayed until security is provided.

While in funded litigation the reality has been that orders for security for costs made against a representative applicant have been paid by the funder, until now the orders themselves have only been available as against the party to the proceedings. However, on 8 October 2019, his Honour Justice Lee of the Federal Court broke new ground when he made orders for payment of security directly against a non-party funder in a class action proceeding.

Facts

Turner v Tesa Mining (NSW) Pty Limited1 is an interlocutory decision in dual2 industrial class actions brought by Simon Turner (Turner) on behalf of groups of employees of Tesa Mining (NSW) Pty Limited (Tesa Mining) and Ready Workforce (A Division of Chandler Macleod) Pty Ltd (Chandler Macleod) concerning alleged breaches of the Fair Work Act 2008 (Cth) (FW Act). The class actions are being case managed concurrently.

The proceedings are funded by Augusta Ventures Limited (Augusta).

Mt Arthur Coal (a respondent in both proceedings), and two companies within Chandler Macleod group (respondents in the Chandler Macleod proceedings) sought orders for security against Augusta.

Argument

Central to the argument against the application for security was s 570 of the FW Act, which limits the circumstances in which a party to a proceeding may be ordered to pay costs in circumstances where:

  1. the Court is satisfied that the party instituted the proceeding vexatiously or without reasonable cause; or
  2. the Court is satisfied that the party’s unreasonable act or omission caused the other party to incur the costs; or
  3. the Court is satisfied of both of the following:
  1. the party unreasonably refused to participate in a matter before the FWC;
  2. the matter arose from the same facts as the proceedings.

These limitations essentially create a ‘no costs’ jurisdiction. Augusta opposed the making of an order against it for security on the grounds that:

  1. not only was there no power to order security against a non-party, but even if such power existed, the respondents should not be entitled to security in circumstances where costs are not ordinarily available on judgment; and
  2. it would be inequitable to award security where Augusta, putting up security, is unlikely to be able to recover costs against the respondent should the litigation be successful.

The decision

His Honour determined that he did have power to order payment of security against Augusta.  He dismissed the notion that s 56 of the Federal Court of Australia Act 1976 (Cth) (Act) restricts the power of the Court to ordering security for costs against an applicant only. 

Section 23 of the Act provides the Court with powers to 'make orders of such kinds, including interlocutory orders, and to issue, or direct the issue of, writs of such kinds, as the Court thinks appropriate' and s 33ZF of the Act provides general powers to 'make any order the Court thinks appropriate or necessary to ensure that justice is done in the proceeding'. His Honour held that any suggestion that either ss 23 or 33ZF could not be used to award security against a non-party because s 56 only provides for an award against a party to be unpersuasive.

In making the order for security for costs against Augusta, his Honour:

  1. considered prior decisions where it was noted that:
  1. where the third party would receive a share of the verdict, it is appropriate that the third party bear part of the risk;3
  2. courts 'should be readier to order security for costs where the non-party who stands to benefit from the proceeding is not a person interested in having rights vindicated' (as would be a shareholder or creditor), but 'rather is a person whose interest is solely to make a commercial profit from funding the litigation';4
  3. in considering the principle of stultification (being where an order that security be paid would stultify that claimant’s ability to continue with the proceedings thus preventing access to justice), that 'a court is not justified in declining to order security on the ground that to do so will frustrate the litigation unless a company in the position of the appellant here establishes that those who stand behind it and who will benefit from the litigation if it is successful … are also without means';5

and

  1. considered the circumstances in which a funder will be liable to pay adverse costs if the proceedings were unsuccessful:
  1. where under the funding agreement, the funder agreed to meet any adverse costs orders made against the funded party;
  2. where the funder provides an undertaking to the Court or respondent to pay adverse costs directly; or
  3. under the discretionary power to award costs against non-parties to litigation, where it is in the interests of justice to do so.6

His Honour further noted that the only limitation on the discretion of the Court as to security is that it be exercised judicially.7

In response to the 'no costs jurisdiction' argument, his Honour  considered that s 570 should be taken as 'having put in place a protection preventing the usual cost-shifting rules applying against a party' having the effect of safeguarding the ability of an applicant to bring an action without concern of the financial consequences of an adverse costs order. However, he found '[t]here is no compelling textual or contextual argument which would suggest that this protection should be somehow extended to non-party funders who are using these claims to their perceived commercial advantage'.

His Honour also dismissed the argument that it would be inequitable to award security against Augusta in circumstances where the applicant, Mr Turner, is unlikely to be able to obtain an order for costs against the respondents if he was successful. Although he considered this to be a better argument, he did not consider the unfairness suggested by the asymmetry caused by an order to be significant.

It was noted that Mr Turner was impecunious, and in an individual claim he would be entitled to the benefit of s 570, but 'he is acting in part in a representative capacity and his impecuniosity does not provide a shield behind which the Funder can shelter'.   

Comment

This decision will have widespread implications on applications for security for costs in funded litigation. However it remains to be seen whether future applications will seek to restrict the circumstances in which such orders will be made – particularly in cases where the cost-shifting rules apply in the usual manner.

The Courts are likely to want to define circumstances in which orders against funders are appropriate. We expect to see future applications for security seeking orders be made against a funder at first instance, or in the alternative against the party, until such ‘appropriate circumstances’ are better defined. 

.....

1 [2019] FCA 1644.
2 The first being ACD 46 of 2018, Turner v Tesa Mining (NSW) Pty Limited, and the second being ACD 47 of 2018, Turner v Ready Workforce (A Division of Chandler Macleod) Pty Ltd.
3 Chartspike Pty Ltd v Chahoud [2001] NSWSC 585, [5] (per Young CJ in Eq).
4 Green (as liquidator of Arimco Mining Pty Ltd) v CGU Insurance Ltd [2008] NSWCA 148; (2008) 67 ACSR 105, 120-121 [51] (per Hodgson JA).
5 Bell Wholesale Co Ltd v Gates Export Corporation (1984) 2 FCR 1, 4.
6 Knight v FP Special Assets Limited (1992) 174 CLR 178.
7 Abbott v Zoetis Australia Pty Ltd (No 2) [2019] FCA 462; (2019) 369 ALR 512, 517 [15].

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Michael Bath

Michael Bath

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