Bufalo Corporation Pty Ltd (Rec & man app'td) (in liq) v Lendlease Primelife Limited & Ors

Bufalo Corporation Pty Ltd (Rec & man app'td) (in liq) v Lendlease Primelife Limited & Ors - [2010] VSC 263 - VSC 2010 case summary — Zoe

[65]

Security for costs cases. Then there are cases in which the funding of litigation by non-parties has stimulated consideration of the justice of making security for costs orders. Mr Jackson QC placed particular stress on Green (as liquidator of Arimco Mining Pty Ltd) v CGU Insurance Ltd. In relation to an application for security for costs by a defendant against a liquidator plaintiff in litigation financed by a litigation funder, Hodgson JA said:

"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 ... 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."

The funder in this appeal attempted to distinguish this passage as being concerned with the species of which Green's case is an example - a "trafficking" case. The funder stressed the word "solely" in the first sentence. But neither that word, nor the word "purely" in the second sentence, should restrict Hodgson JA's reasoning to a point short of cases like the present. Here the funder was hazarding $300,000 (or $200,000) to gain the return of that money plus a $630,000 (or $730,000) success fee. The funder was not a professional litigation funder or a "trafficker", but the extent to which it was a creditor of the plaintiff before the litigation was not something upon which the plaintiff's evidence cast much light. Hodgson JA's reasoning is equally applicable to cases like the present, where a non-trafficker funding an impecunious plaintiff is substantially or primarily motivated by a desire for commercial profit but has not assumed responsibility for the costs which the impecunious plaintiff is ordered to pay when the litigation fails. If the court system is "primarily there" to enable rights to be vindicated rather than to enable commercial profits to be made, it follows that a non-plaintiff who funds the plaintiff with the primary purpose of making commercial profits out of the litigation is behaving extraneously to the proper function of litigation, at least where the funder avoids responsibility for the costs of the defendant. It is behaviour outside the purpose which the process is supplied to serve. It is not making a legitimate use of that process. Rather it abuses that process.

The extent to which Hodgson JA's thinking is adverse to the funder's stance in this case may be appreciated from the submission which his reasoning rejected. The submission was:

"the circumstance that someone other than a plaintiff who is a natural person stands to gain, along with the plaintiff, from success in the proceedings was not an important factor which could justify an order for security ... [T]his was particularly so where this other entity had indemnified the plaintiff against costs ordered to be paid to the defendant, and thus could be made liable to pay them at the instance of the defendant."

Hodgson JA's rejection of that submission reveals a concern that a non-party who funded litigation purely for commercial profit, should not avoid responsibility for costs if that litigation fails, even where the litigation funder had indemnified the plaintiff against costs ordered to be paid to the defendant. Hence he ordered security for costs. That order operated as a supplement, so to speak, to the indemnity. Had there been no indemnity, the case for an order for security for costs would have been much stronger.

Hodgson JA referred to Fiduciary Ltd v Morningstar Research Pty Ltd. Austin J there said, in ordering two corporate plaintiffs to provide security for costs where they were backed by a litigation funder not shown to be incapable of providing security: "[I]t is fair for the courts to proceed on a basis which reflects the proposition that those who seek to benefit from litigation should bear the risks and burdens that the process entails." Austin J relied on, and Hodgson JA referred to, an observation by Young CJ in Eq in Chartspike Pty Ltd (in liq) v Chahoud. It was part of the Chief Judge's reasons for making an order that the plaintiff provide security for costs to the effect that where an insolvent corporate plaintiff had contracted to have litigation funded by a third party in return for that third party receiving a share of the verdict. He said: "it is appropriate that the third party bear part of the risk." Young CJ in Eq's evident contemplation was that the third party funder would arrange for the security to be provided. He made the order even though the funding agreement had given indemnities to the plaintiff against adverse costs orders.

Similarly, the primary judge in Green (as liquidator of Arimco Mining Pty Ltd) v CGU Insurance Ltd, Einstein J, spoke of "the disinclination of the Court to permit a win-win situation for an outside party: that is to say to permit a lender who stands behind the [plaintiff] awaiting to benefit from a success in the proceedings to avoid having a fair responsibility for the costs of the [plaintiff] in the event that the proceedings fail".

[74]

However, in my opinion 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 (Campbells Cash and Carry Pty Limited v Fostif Pty Limited [2006] HCA 41; 229 CLR 386 at [87]- [95]), 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.

In this case, the funder could perhaps be liable for costs, at the instance of the defendant; although Young CJ in Eq in Chartspike Pty Limited v Chahoud [2001] NSWSC 585 said there would be difficulty in enforcing this kind of indemnity, because the funder is not an insurer who could be sued pursuant to the Law Reform (Miscellaneous Provisions) Act 1946 (NSW) s6. If in such a case the funder did not willingly pay a costs order against the plaintiff, there is a question whether the defendant could bring proceedings in which the plaintiff and the funder were joined as defendants in order to enforce the indemnity against the funder; and even if this were possible, the proceedings would be cumbersome and could well be highly contentious. I note also that, in this case, the funder can avoid liability for future costs by terminating the funding agreement; and this could happen in such a way that CGU would need to expend further costs in order to obtain a decision in its favour, with no possibility of enforcement of those costs against the funder. (Problems such as these could possibly be overcome if the funder undertook to the court to be subject to any order for costs the court might make or consented to be joined as a party for that purpose: cf UCPR 42.3.)

In all these circumstances, in my opinion, the existence of the funder and the funding agreement is a matter that favours an order for security which, according to the funding agreement, the funder would be obliged to comply with. This view is supported by the consideration that in this case the court is left in the dark as to the proportion to which the funder is entitled of any verdict obtained by the liquidator; although, because this is the result of a claim of legal professional privilege, the court would not be justified in drawing any conclusion that the proportion to which the funder is entitled is unreasonably high: cf Wentworth v Lloyd [1864] EngR 492; (1864) 10 HL Cas 589; 11 ER 1154. (It may be that where the court knows the extent of the funder's interest in the outcome of the case, this could be a factor which might lead the court to order security for less than the totality of the costs.)

Accordingly, I find no error by the primary judge in his regard to the involvement of a litigation funder.

[87]

Security for costs is often a vexed question. The principle of access to justice is no doubt why r 5.45 our High Court Rules does not empower orders for security against a natural person who is resident in New Zealand. Many, if not most, of the persons represented in this litigation are natural persons resident in New Zealand, although among them is an Australian trustee company in which a large number of investors are interested; it may be ordered to provide security under r 5.45(a)(ii). It is the risk of impecuniosity and failure to pay an adverse costs order that leads a court to order security where it has jurisdiction to do so. Yet a large security order may deter a plaintiff from pursuing a claim with merit. Further, as earlier noted, Jeffery & Katauskas shows that the presence of a litigation funder can give rise to a range of judicial responses.

The making of orders for both representation and admission of a funder substantially alters the balance between plaintiffs and defendants. We consider that the change is so radical as to justify the High Court, in exercise of its inherent jurisdiction under s 16 of the Judicature Act 1908, to consider ordering security as a term of such orders, even where numerous natural persons are among the plaintiffs, as the price of the privilege to employ such a procedure. That is in order to protect defendant against the effect of a procedure which could otherwise be oppressive. The facts that the funder has no personal right at stake, that takes part of the proceeds of any claim, and that it is is motivated by the financial considerations that gave rise to the common law prohibition of champerty point to the need for the funder to provide security for costs in most cases. Arkin v Borchard Lines Ltd (Nos 2 and 3) [2005] 1 WLR 3055 (CA) applied to a litigation funder Lord Denning MR's dictum in Hill v Archbold [1968] 1 QB 686 (CA) that maintenance "[i]s lawful, provided always that the one who supports the litigation if it fails, pays the costs of the other side". Where there is doubt about the bona fides of the funder or bad behaviour on the funder's part, the case for declining approval or ordering such security, perhaps on an indemnity basis, is strengthened. Where an application for approval of a funder is met by an application for security for costs the enquiry may include not only the funder's means but also whether it is of such standing that its decision to fund provides a worthwhile pointer to the merits of the case. We make no comment on the competing views in Jeffery & Katauskas, which turned on the terms of a costs rule which has no New Zealand equivalent. But the result, where the funder of a failed case escaped liability for costs, provides a cautionary example.

[98]

(1) Primelife and Sent

(a) I would allow the claim of $51,734.50 mentioned in paragraph 29(a) above.

(b) The period mentioned in paragraph 29(b) above spans the previous application for security for costs, directions hearings, case management conferences, various pleading disputes and the leave granted to the plaintiff to file and serve a further amended statement of claim. There was a substantial amount of work involved and I would allow that claim in the sum of $101,190.41.

(c) I would also allow the claim for $2,392.05, for the period 28 November 2009 until 4 March 2010.

(d) I am most sceptical of the estimate of $742,288.50 as the amount of the claim from the period 4 March 2010 until the first day of trial. In my opinion a sum of $250,000 is a generous allowance for preparation for the relevant period up to and including the first day of trial, but that allowance is to include the amounts mentioned in paragraphs (a), (b), and (c) above.

(e) I do not understand why a separate claim has been made for the security for costs applications mentioned in paragraph 29(e) above. While the claim is certainly more specific it appears to overlap with the more general description of the work mentioned in paragraph 29(b) above. It is true that there is not a complete overlap, but the isolation of the costs associated with the applications for security for costs has made it difficult to be satisfied with the reasonableness of the overall claim for the period. Accordingly, I will not allow that claim in addition to the claim mentioned in paragraph 29(b) above.

(f) Accordingly, I would allow Primelife and Sent additional security for costs until the first day of trial in the sum of $250,000.

(2) Darrer

(a) I would allow in full the claim mentioned in paragraph 34(a) above.

(b) I would allow in full the claim mentioned in paragraph 34(b) above.

(c) In relation to the claim mentioned in paragraph 34(c) above, Darrer has already conceded that this amount should be reduced by $28,000. In my opinion it should be reduced by a further sum of $22,000 reflecting an excessive claim for preparation for trial.

(d) I would allow the claim in paragraph 34(d) above only because there is no overlapping period to which the claim relates.

(e) I will not allow the claim mentioned in paragraph 34(e) above as it falls within the periods (a), (b) and (c). The overlap creates uncertainty as to its validity as a separate item of charge.

(f) Accordingly, I would allow Darrer additional security for costs up to and including the first day of trial in the sum of $225,000.

(3) Rathner

The starting point for Rathner is the assessment made by Ms Van Den Berg of an estimated cost of preparation for trial in the sum of $243,495.80. Having reviewed the basis of the assessment, I consider that no allowance should be made for a notice to admit. The claim for the preparation of a witness statement for Mr Rathner seems excessive. The claim of $41,378 to read witness statements filed by the other parties seems excessive. The claim of $111,066.80 for "trial preparation" is excessive. Of that sum, $94,120 is counsel's fees. I would allow five days for each of senior and junior counsel only. The item, "instructions for brief to date of trial" seems to overlap with other items, in particular, preparation of Rathner's witness statement. I will allow Rathner the sum of $150,000 by way of additional security until the first day of trial.

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