The civil law exists as a facility for determining disputes. A plaintiff has a right to bring a claim against a defendant in circumstances where they believe they have been wronged, and seek either rectification or compensation for that wrong.
Australia is a “costs” jurisdiction, which means that the general rule is that “costs follow the event” – that is, the unsuccessful party is usually ordered to pay the costs of the successful party. But what if the unsuccessful party has no money to pay the costs order? Why should the unsuccessful party be out of pocket?
Enter security for costs.
The Court rules make provision for a defendant to ask the Court to make an order that the plaintiff pay a sum of money to the Court for safekeeping (or some other acceptable form of security), to be used towards the defendant’s costs in the event that the plaintiff’s claim is unsuccessful. The funds are released to the plaintiff if their claim is successful.
Security for costs is not an automatic right of a defendant. The circumstances in which an order for security for costs can be obtained are set out in Part 42 of the Uniform Civil Procedure Rules 2005 (NSW) and Part 19 of the Federal Court Rules 2001 (Cth). Both rules require a defendant to establish a genuine concern that the plaintiff may not have the means to satisfy a costs order if one is ordered against it.
Things get more complicated where a plaintiff is bringing a class action. The purpose of class actions is to allow groups of people whose claims share a set of common facts to participate as a group in one set of proceedings. These individual claims are usually too small to be economical to run on an individual basis, but when considered together they can add up to a large collective claim, providing access to justice for those to whom it might otherwise be unattainable. This is also beneficial to the Courts and to the defendant, in avoiding being bogged down in hundreds if not thousands of small claims.
In class actions, the plaintiff is the representative of a larger group, however generally only the plaintiff is personally on the line for any costs order in favour of the defendant. The other group members are protected by section 181 of the Civil Procedure Act 2005 (NSW) (“CPA”) or section 43(1A) of the Federal Court of Australia Act 1976 (Cth) for all matters which are common issues in the class action.
In Bray v F Hoffman-La Roche Ltd (2003) 130 FCR 317, Carr J held that the power to order security for costs is to be exercised by balancing the policy reflected in section 181 of the CPA against the risk of injustice to a defendant. The Courts will consider the support of an external litigation funder, or whether the representative is suing on behalf of a person with assets who seeks to avoid a costs liability. In the absence of either of these, and in circumstances where the representative party is without sufficient means or assets, then a determination of whether security will be ordered (and, in particular, whether an order for security will stifle the proceedings) requires that consideration be given to the financial circumstances of group members. If a reasonably strong case for security is made out then it may, and often will, be appropriate to ascertain the capacity and willingness of group members to contribute to a fund to meet any order for security that is made against the representative party.
As evidenced by the decision in De Jong v Carnival PLC  NSWSC 347, while the Court does not have the power to force group members to contribute to an order for security for costs, it does have the power to stay the proceedings if the group members unreasonably refuse to contribute, or to remove those refusing members from the group.
For several reasons, it is becoming more and more common for class actions to be supported by external funders. Due to the nature of representative proceedings, group members are not usually in a position to pay their lawyers upfront. As class actions are often lengthy and expensive to run, this limits the ability of a law firm to run the claim on a ‘no win, no fee’ basis, and survive financially in the interim. Adding this to the exposure faced by the group representative to any adverse costs orders, it is difficult to get a group member to agree to accept this role unless they are protected in some way from adverse costs.
External funders will provide an indemnity to the group representative relieving them of this liability risk. They will also pay the lawyers some or all of their fees so that the matter can be run, and in exchange for this capital expenditure risk, the group members agree to pay the funder a portion of their damages awarded if the class action is successful.
This means that when a defendant seeks an order for security for costs against a plaintiff in a funded class action, that order is met by the funder. As part of their own risk mitigation, a funder will usually obtain an insurance policy for ‘after the event’ (“ATE”) protection, which covers the legal costs and expenses involved in litigation.
Previously, evidence of an ATE policy was often accepted as sufficient security for costs in a class action, however this may change in light of a recent decision of the Federal Court by Yates J in Petersen Superannuation Fund Pty Ltd v Bank of Queensland Limited  FCA.
In Peterson, his Honour Yates J took into account the following considerations in rejecting the ATE policy:
- The policy insured the applicant and not the respondents, and there exists no mechanism by which the respondents can compel the applicants to claim on the policy ;
- The applicants gave undertakings to the Court but not to the respondents, and in any event there was no evidence to suggest those undertakings of themselves would provide the respondents with sufficient security as the corporate applicant was impecunious and the natural applicants (the husband and wife directors) put on no evidence of their financial position ;
- The ATE policy contained a significant number of exclusions from liability and other conditions affecting the applicants’ legal entitlements under the contract of insurance ;
- The policy was not a policy of unconditional indemnity in favour of the respondents which could be purchased but at a higher cost which the funder was not prepared to meet ;
- The UK cases with respect to ATE policies should be treated with caution for the reason that the exclusions from liability in this ATE policy appeared to be different, and more extensive and onerous than those in the UK cases ;
- The ATE policy could be cancelled before a costs order is made against the applicants and therefore before a legal liability arises to which the ATE policy can respond ;
- There was the question of what would happen to the proceeds of payment under the ATE policy if the corporate applicant went into liquidation – there is nothing on the face of the policy to suggest that there was any intention to create an express trust (in the form of a Quistclose trust) in favour of the respondents in respect of the insurance proceeds ;
- The limitation of the insured liability under the ATE policy ($5.5 million) was not a reason for rejecting the policy as providing sufficient security .
While these considerations certainly leave a lot of room for other funders to ensure that their undertakings and ATE policies plug the holes identified by Yates J above, it remains unclear whether the days of the existence of an ATE policy being accepted as sufficient security are over, and whether provision of more liquid security such as a bank guarantee or cash deposit will be enforced.
Watch this space.
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Kate Martin, Associate