Davis v Wilson [2025] FCA 666 | Case summary

Davis v Wilson [2025] FCA 666 | Case summary | Zoe

[33]

I made orders that the parties (a) confer about the answers to be given to the Common Questions in order to give effect to my reasons in the February Judgment, and (b) seek to resolve the question of costs, failing which they were to make any relevant applications as to costs supported by evidence and submissions.
The parties have since reached substantial agreement as to the answers to be given to the Common Questions but remained in dispute over a handful of them (specifically, as to questions 1.1, 3 and 4). The disputes between the parties largely turned on whether I considered it necessary to answer a small number of questions in a particular way in light of my reasons in the February Judgment. The parties agreed that I did not need to give reasons for resolving the remaining disputes between them as to the answers to be given to the Common Questions, and that it was a matter for me as the trial judge to answer the questions as I considered appropriate based on my earlier reasons. In light of the position taken by the parties, my answers to the Common Questions are set out in Annexure A to the Orders I have made today. These answers are to be read together with the reasons set out in the February Judgment.
The remaining contest between the parties relates to costs. Mr Wilson and EY each filed interlocutory applications seeking that (a) the Davis Applicants pay their respective costs of, and incidental to, the proceedings on the ordinary basis, and (b) the costs of the proceedings be fixed in a lump sum. Mr Wilson and EY also seek orders for costs against the litigation funder, LCM Operations Pty Ltd (LCM), such that it is jointly and severally liable to each of the Respondents for their respective costs of the proceedings. LCM opposed these orders.
Whilst the Davis Applicants accepted that the costs of the proceedings should be fixed in a lump sum, they opposed the orders sought against them and filed their own interlocutory application seeking that the Court exercise its discretion to make "issues based costs orders". In essence, such orders would make the Respondents liable to the Davis Applicants for their costs in respect of those issues on which the Davis Applicants were successful while the Davis Applicants would otherwise be liable to the Respondents for their costs in respect of the remaining issues on which the Davis Applicants were unsuccessful. Additionally, the Davis Applicants sought orders that the Respondents pay their costs incurred in connection with the affidavits filed by the Respondents but not read by them. Alternatively, the Davis Applicants submitted that the Court should apportion costs such that they be liable only for 50% of the Respondents' costs or such other amount as considered appropriate.
I deal with each of the disputed issues in turn.

[37]

Section 43 of the Federal Court of Australia Act 1976 (Cth) (FCA Act) gives the Court a wide discretion to make an award as to costs, which is to be exercised judicially: Idenix Pharmaceuticals LLC v Gilead Sciences Pty Ltd (No 2) [2018] FCAFC 7 (Nicholas, Beach and Burley JJ) at [3] citing Les Laboratoires Servier v Apotex Pty Ltd [2016] FCAFC 27; 247 FCR 61 at 132 [305] (Bennett, Besanko and Beach JJ).
It has often been observed in this Court that the "ordinary rule is that costs follow the event...": Idenix at [3] citing Les Laboratoires at 130 [297]-[298]; see also Firebird Global Master Fund II Ltd v Republic of Nauru (No 2) [2015] HCA 53; 327 ALR 192 at 193 [6] (French CJ, Kiefel, Nettle and Gordon JJ).
However, it has also been observed that s 43 of the FCA Act does not prescribe a general or ordinary rule as to costs and does not specify that costs are to follow the "event": see Queensland North Australia Proprietary Limited and others v Takeovers Panel and others (No 2) [2015] FCAFC 128; 236 FCR 370 (Dowsett, Middleton and Gilmour JJ) at [17]-[18]. This position is to be contrasted to r 42.1 of the Uniform Civil Procedure Rules 2005 (NSW). For the reasons explained by the Full Court in Queensland North at [9]-[19], there can at times be a contest as to the relevant "event" and whether it refers to the overall outcome of the case or by reference to particular issues at trial: referring to Interchase Corporation Ltd v ACN 010 087 573 Pty Ltd [2001] QCA 191; [2003] 1 Qd R 26 at [83] (McPherson JA). The Full Court in Queensland North stated at [16] that in this Court "the expression, 'costs follow the event', has been used to describe an award of costs based on the overall outcome, rather than success or failure on individual issues".
Although the Court would generally make an order in favour of the "successful party", s 43(3)(e) of the FCA Act provides that the Court may make an award of costs in favour or against a party whether or not the party is successful in the proceeding. The circumstances in which costs may be awarded against a party that has not been successful in the proceedings have been addressed in numerous decisions. Most conveniently, the Full Court in Queensland North stated at [8] that the decisions of this Court:

[41]

The authorities establish that issues-based costs orders do not need to be tethered by reference to particular causes of action and can be determined by reference to issues of fact or law. Equally though, a court will be reluctant to adopt an approach of apportioning costs between different issues where it is likely to be difficult, if not impossible, to allocate items of costs between the different issues: PKT Technologies Pty Ltd v Peter Vogel Instruments Pty Ltd (No 2) [2020] FCAFC 46 at [15] (Besanko, Banks-Smith and Stewart JJ). This is to be contrasted to circumstances where there are discrete and severable issues on which the generally successful party failed, and which added to the cost of the proceedings in a significant and readily discernible way": Koolan Iron Ore Pty Ltd v Infrassure Ltd (No 4) [2024] FCA 894 at [7(4)] (Jackson J), quoting Strzelecki Holdings Pty Ltd v Jorgensen [2019] WASCA 96; 54 WAR 388 at [51] (Murphy, Mitchell and Pritchard JJA); see also Greiss v Seven Network Operations Ltd (Costs) [2024] FCA 377 at [17] (Katzmann J); Edwards v Nine Network Australia Pty Ltd (No 6) [2024] FCA 758 at [40] (Wigney J).
If an apportionment of costs is considered to be appropriate on an issues basis, the object is not mathematical precision but a result that best reflects the interests of justice in the overall circumstances of the case: EMI Songs Australia Pty Ltd v Larrikin Music Publishing Pty Ltd [2011] FCAFC 92 at [9] (Emmett, Jagot and Nicholas JJ). However, as Mortimer J (as her Honour then was) observed in Plaintiff S111A/2018 v Minister for Home Affairs (No 5) [2022] FCA 603 at [42] that "[g]enerally, the authorities encourage caution against apportioning the costs of a successful party by some kind of division into the issues on which the party succeeded and those the party did not".
There was a contest before me as to which of the rival parties was truly the successful one. During the course of oral submissions, the Davis Applicants initially submitted that the logical starting position from which the analysis should commence would be that the relevant event by which to measure the success of the rival parties was the dismissal of the proceedings: T18.1-8. However, after considering the force of the Full Court's decision in Queensland North, the Davis Applicants refined their position to contend that, in fact, they had been successful: T61.23 ff. I do not accept that submission.
The starting position has to be considered by reference to the fact that, although the proceedings were constituted as representative proceedings requiring a number of common questions to be answered, the purpose of the proceedings was to secure orders for compensation under the Corporations Act and ASIC Act, and, additionally, in the case against EY, damages. This is the relief that was sought in the Further Amended Originating Application. No declaratory or other relief was sought. The Davis Applicants did not secure the relief that they sought and, as a result, they have not been successful. On the other hand, the Respondents have been successful in resisting that relief. In that sense, the Respondents have been, overall, the successful parties in the litigation. As the successful parties, it would ordinarily be expected that the Respondents would be entitled to their costs of the proceedings on the ordinary basis.
It is not uncommon in proceedings before the Court and, in particular, in litigated representative proceedings that a respondent is successful in resisting the relief sought against it, despite it having lost on other primary issues along the way including as to contravention or liability: e.g., see Worley at [4]; Merck Sharp & Dohme (Australia) Pty Ltd v Peterson (No 2) [2011] FCAFC 146 at [3]-[8]. The question that then arises is whether the Respondents should be ordered to pay some part of the Davis Applicants' costs or be denied a portion of their costs by reason of their failure on particular issues.
An issued based approach to costs may be appropriate in some cases, but not all. The fact that the Court does not accept all of the arguments of a successful party does not of itself make it appropriate to deal with costs on an issue-by-issue basis: Victoria v Sportsbet Pty Ltd (No 2) [2012] FCAFC 174 at [8]. In my view that is the position that prevails here.
The Davis Applicants submitted that costs should be apportioned and payable in their favour as to those issues that I had determined in their favour. The Davis Applicants' case in this respect used as a convenient guide my summary of the findings that I had made in the February Judgment as set out at J [24]. For ease, the Davis Applicants submitted that they had been successful in establishing that:

[43]

However, the Davis Applicants' contentions as to their success in respect of each of these issues concealed the fact that these issues contained many interwoven and independent issues in respect of which the Davis Applicants were not successful.
For example, although the Davis Applicants established that the heartwood yield assumption in respect of trees aged under five was unrealistic and lacked a reasonable foundation, they did not establish this to be the case in respect of trees aged five and over. This meant that the findings in relation to the Wilson Representations and the EY Representations were only established to that extent and, in turn, the contraventions that were established were also limited to that extent.
Further, the characterisation of the case as one involving the Davis Applicants' success on these particular issues also conceals the complexity of the litigation including the fact that the evidence (both testimonial and documentary) was directed to factual and legal issues in respect of which the Davis Applicants did not succeed. As EY pointed out, the very same witnesses whose evidence went to the estimated heartwood yield for the trees aged under five (Dr Barbour, Mr Basford, Mr Brown, Mr Woodall, Mr Morton, Mr Westworth and Mr McGregor) dealt, in various combinations, with aspects of the case in respect of which the Davis Applicants were unsuccessful. Specifically, as EY submitted, this evidence was relevant as follows:
1. counterfactual heartwood yield, for trees of all ages - on which the applicants failed;
2. heartwood yield for trees aged 5 and over - on which the applicants failed;
3. processing costs - on which the applicants failed;
4. mortality - which was expressly abandoned in oral closing submissions and withdrawn in the Fifth Further Amended Statement of Claim (5FASOC), filed after the hearing concluded;
5. discount rates - which were expressly abandoned in written closing submissions and withdrawn in the 5FASOC;
6. foreign exchange - which was ignored in the applicants' closing and quietly withdrawn in the 5FASOC; and
7. oil yield - which Dr Barbour conceded in conclave and was formally abandoned with the filing of the Fourth Further Amended Statement of Claim (4FASOC) on 3 April 2024.
In addition, to the extent that the Davis Applicants succeeded in establishing certain matters that were relevant to the contraventions that I found, my findings did not involve acceptance of the various ways in which the Davis Applicants put their case. For example, my analysis and findings in relation to the interpretation and application of the relevant accounting and auditing standards did not rest upon acceptance of the Davis Applicants' submissions in relation to those matters. Nor did I accept all of the Davis Applicants' contentions as to the findings to be made, or the inferences to be drawn from, a large volume of documentary materials.
I am not satisfied that the approach contended for by the Davis Applicants involves an appropriate exercise of discretion. The task of apportioning costs between different issues is fraught with difficulty in a case such as this one where many issues and evidence were interwoven. I do not consider that the issues identified by the Davis Applicants are neat, discrete and severable issues in respect of which costs could be apportioned in a readily discernible way.
That is not to say that I do not accept that the Davis Applicants succeeded in establishing that the DCF Model was flawed in respect of its valuation of the trees aged under five and that this impacted upon the representations made by Mr Wilson and EY leading to the Davis Applicants successfully establishing particular contraventions. However, in my view, the proper exercise of discretion in a case of this type involves recognition of the stark reality that the Davis Applicants did not establish fundamental aspects of the case by which they could be regarded as being successful. In this regard, it is neither necessary nor useful to regard the Davis Applicants success in these respects as "Pyrrhic", though that descriptor may have been, or may be, apposite to the outcome in other cases.
It is next necessary to turn to the Davis Applicants' contentions that they should be entitled to their costs associated with the affidavits served by Mr Wilson and EY but which were not read in respect of witnesses who were not ultimately called to give evidence. The Davis Applicants relied upon the decision of Stevenson J in Downer EDI Rail Pty Ltd v John Holland Pty Ltd [2018] NSWSC 581 at [12]-[24]. There, Stevenson J ordered at [24] that "[t]he costs...payable" were not to include any costs "referable to the preparation of the affidavits of [the successful defendant's uncalled witness]" and that the successful defendant was to pay the "plaintiffs' costs of considering and preparing replies to the [uncalled witness'] Affidavits and of preparing cross-examination on them" and that such costs be set off between the relevant parties. In making these orders, Stevenson J reasoned (at [12]-[20]) that whilst the successful defendant had made a forensic decision that was open to it and could not be criticised for the timing of that decision, it was nevertheless the case that significant costs had been incurred including in relation to lengthy affidavits.
The Respondents relied upon the decision of Edelman J in Hampton v BHP Billiton Minerals Pty Ltd [2012] WASC 285 (S), where his Honour stated at [18]-[19]:

[47]

The authorities indicate that the mere failure to call a witness does not disentitle that party to the costs tethered to that evidence. Nor does such a failure require an apportionment of costs. The decision not to call particular witnesses or read their affidavits is part and parcel of the forensic decisions a defendant may make at the close of its opponent's case. As Edelman J observed, a defendant is entitled to elect not to call a witness and this election can prove beneficial to the Court and parties alike by saving time and diminishing expenses.
In fact, Stevenson J accepted in Downer EDI that "in the ordinary way it would be unwise to penalise a party for making such decisions by depriving it of the costs of preparing evidence that, ultimately, was not put before the court": at [14], citing Management Services Australia Pty Ltd v PM Works Pty Ltd (No 2) [2018] NSWSC 336 at [34] (McDougall J). However, his Honour considered that each case must turn on its own facts and, in the case before him, the witnesses that were not called were principal witnesses, one of which gave "extensive" evidence while the other gave "lengthy" evidence that "contained numerous attachments": Downer EDI at [17]-[20]. It was by reference to the exceptional circumstances of that case that Stevenson J considered that the justice of the case required that a special costs order be made: [19], [23].
The outcome in Downer EDI is reflective of its particular facts. In the present case, I do not consider that the justice of the case requires the apportionment of the costs associated with the Respondents' unread evidence or uncalled witnesses. As Mr Wilson pointed out, although his unread affidavit was 241 pages in length, 228 of those pages were annexed documents which were in any event tendered at trial or otherwise referred to in the Davis Applicants' pleadings. In much the same way, EY's decision not to call its witnesses was made after the abandonment of certain complaints about its audit. In each case, the Respondents' decisions not to call their respective witnesses saved the Court the time and expense that would otherwise have resulted.
It follows that no special order should be made for the costs incurred in relation to the evidence that was filed but not read by the Respondents.
Finally, it is necessary to consider the Davis Applicants' alternative position that they should only be ordered to pay 50% of the Respondents' costs on the ordinary basis, or such other proportion of those costs as the Court considers just. The Davis Applicants' contentions in this regard sought to invoke the Court's general discretion to award the Respondents something less than their entitlement to costs on the basis of a general assessment of the outcome of the proceedings and their conduct.
Although the Court's discretion to award costs is at large, it is to be exercised judicially. As noted above, it has generally been held that a successful party may be disentitled to costs where it has been only partially successful, the extent of its success, or by reference to its conduct. Mortimer J's reasoning in Plaintiff S111A/2018 (at [42]-[43]) reflects an approach to the exercise of the broad discretion conferred upon the Court where there were "somewhat exceptional" circumstances that warranted a reduction in the costs payable to a successful plaintiff. There, the decision took into account many issues that were not pressed and arguments that were underdeveloped by the applicant, which placed a burden on the respondents to assist the Court (including by taking responsibility for the preparation of the court book instead of the applicant as the moving party). These exceptional circumstances do not exist here.
In essence, much of the Davis Applicants' submissions were tantamount to a contention that they should not be required to pay the Respondents' costs on the ordinary basis on account of the fact that the Davis Applicants succeeded on some parts of the case where the Respondents failed. However, it is part of the thrust and parry of commercial litigation, and, for that matter, any litigation, that one party may not win on every argument and point that is raised or run. In Marmax Investments Pty Ltd v Rpr Maintenance Pty Ltd (No 2) [2015] FCAFC 155, the Full Court (Middleton, Foster and Gleeson JJ) quoted the observations made by Burchett J in Australian Conservation Foundation v Forestry Commission of Tasmania [1988] FCA 144; (1988) 81 ALR 166 at 169 that:

[49]

Both explicit and implicit within Burchett J's reasons is the idea that costs may be awarded against a successful party where it raises multiple issues unreasonably or raises points of defence that are unreasonable. However, absent conclusions of that kind, a defendant is entitled to defend a case, especially a substantial case such as the present one even if it does not win on every point. An assessment of these matters is not to be influenced by a hindsight bias which punishes a successful defendant for not ultimately succeeding on every argument that was reasonably run. These points conform with the overarching dictates of case management in this Court as enshrined in ss 37M and 37N of the FCA Act.
In the present case, the Davis Applicants stopped well short of characterising the Respondents' conduct as being disentitling. Rather, as noted above, the Davis Applicants' contentions were an extension of the central theme that they should be compensated for having won on some points. I am not satisfied that this would be a proper exercise of discretion.
The Davis Applicants should pay the Respondents' costs of the proceedings on the ordinary basis. All previous orders as to costs thrown away by reason of one or more amendments to the Davis Applicants' case stand. In addition, the Davis Applicants should pay the Respondents' costs thrown away by reason of the 5FASOC. In the result, these additional costs orders may be subsumed by the generality of the broader costs order.
There remains an issue about the costs of the second and third cross-claims respectively brought in the proceedings by EY against Mr Wilson and by Mr Wilson against EY. I accept that, to the extent that the cross-claims added to the costs of the proceeding, they were marginal. However, I do not accept that the Davis Applicants should bear the costs of these cross-claims. As the cross-claims were not matters that I was ultimately called upon to determine in the February Judgment, I consider the appropriate order is that those cross-claims be dismissed and each party bear their own costs of them.

[50]

Both Mr Wilson and LCM sought costs orders against LCM. These orders were opposed by LCM.
The facts relevant to the orders sought against LCM were not in dispute. They may be briefly stated.
On 16 May 2018, the Davis Applicants and LCM entered into a litigation funding agreement styled as a "Representative Proceeding Funding Agreement" (LFA). This document was filed with the Court on 22 June 2018 and included, by way of an annexure, a separate agreement that was also dated 16 May 2018 and which implemented the "2017 QIN Scheme". This "Scheme" was in turn governed by a series of rules (the Scheme Rules).
The terms of the LFA notably included cll 4 and 5, by which LCM assumed responsibility for funding the proceeding and by which LCM agreed to indemnify the Davis Applicants against liability for an adverse order for costs. Moreover, the LFA conferred LCM with the right to choose the Davis Applicants' lawyers: cll 3.9 and 8.1-8.2.
The rights under the LFA existed alongside LCM's rights under the Scheme Rules, a key provision of which was cl 22.3. By this term, LCM was entitled to control the prosecution of the Davis Applicants' claims including by directing how to proceed, prepare and conduct the claims, and by determining whether to abandon, postpone or otherwise resolve the claims. In addition, cl 60.1 of the Scheme Rules entitled LCM to take what was described as the "Funder's Interest" from any proceeds, whether by settlement or judgment.
During the conduct of the proceedings before the Court, the Respondents made applications that the Davis Applicants provide security for their costs. The Court ordered that the Davis Applicants provide security in the form of deeds of indemnity with the total quantum of the security so ordered being $962,500 for Mr Wilson and $3,250,000 for EY. The deeds of indemnity were procured and secured by LCM. There was no specific evidence before the Court as to whether the Davis Applicants were, or are, impecunious, but in light of the earlier security being secured by LCM, there was no real dispute that but for that security and the indemnity granted under the LFA the Davis Applicants would not be in position to be able to pay the likely quantum of the costs that might be awarded in favour of the Respondents (if the Court so ordered).
Against this contractual backdrop, following the publication of the February Judgment, LCM wrote on 25 February 2025 to the legal representatives of Mr Wilson and EY to confirm that it would indemnify Mr Davis against any costs order made against him in favour of their respective clients.
EY's solicitors then wrote to the Davis Applicants' solicitors on 27 February 2025, raising concerns about the enforceability of LCM's confirmation as against the Davis Applicants. To address this, the Davis Applicants were requested to provide an undertaking that they would enforce all rights of indemnity granted by LCM in the event an adverse costs order was made.
This confirmation was provided by the Davis Applicants, whose solicitors conveyed on 6 March 2025 that their clients undertook to call upon their contractual rights of indemnity against LCM and would enforce these rights if necessary.
Since then, the Davis Applicants and LCM each reaffirmed their respective confirmations by way of a letter from LCM addressed to Mr Wilson and EY dated 8 April 2025.

[51]

The Respondents submitted that in circumstances where LCM funded the litigation for its own commercial benefit, then, absent extenuating circumstances or matters of public interest, LCM should be made liable to pay their costs: citing and relying upon, inter alia, Knight v F P Special Assets Ltd [1992] HCA 28; 174 CLR 178 at 192-3 (Mason CJ and Deane J, Gaudron J agreeing); Gore v Justice Corporation Pty Ltd [2002] FCAFC 354; 119 FCR 429 at [22], [64] (O'Loughlin, Whitlam and Marshall JJ); Court House Capital Pty Ltd v RP Data Pty Limited [2023] FCAFC 192 at [10]-[12]; Hardingham v RP Data Pty Limited (Third Party Costs) [2023] FCA 480 at [22] (Thawley J). In particular, the Respondents drew attention to Thawley J's distillation of the relevant principles in Hardingham at [19]-[24] (in respect of which the Full Court in Court House discerned no error) as extracted below:
1. It is not in dispute that the power under s 43 extends to making costs orders against non-parties: Knight v FP Special Assets Limited [1992] HCA 28; 174 CLR 178. Plainly enough, the power to order costs against a third party would only be exercised in circumstances where a non-party has a connection to the ligation which is sufficient to warrant exercise of the power: Dunghutti Elders Council (Aboriginal Corporation) RNTBC v Registrar of Aboriginal and Torres Strait Islander Corporations (No 4) [2012] FCAFC 50; 200 FCR 154 at [89]; Skelin v Self Care Corporation Pty Ltd (No 2) [2022] FCA 50 at [21].
2. One example of where a connection is typically insufficient is where family members provide financial support to an applicant in litigation in which the supporting family member has no commercial interest in the outcome; such assistance is founded in family or social ties and directed at facilitating access to justice for the purpose of vindicating rights - see, for example: Citrus Queensland Pty Ltd v Sunstate Orchards Pty Ltd (No 10) [2009] FCA 498 at [22]; KSMC Holdings Pty Ltd (t/as Hubba Bubba Childcare on Haig) v Bowden (No 3) [2020] NSWCA 158 at [45]; Skelin at [20], [63] to [70].
3. It has been said that an "order for costs against a non-party is only made in exceptional circumstances": Dunghutti at [90]; or that it is rare and exceptional: Vestris v Cashman (1998) 72 SASR 449 at 467; see also: FPM Constructions Pty Ltd v Council of the City of Blue Mountains [2005] NSWCA 340 at [214]; PMWorks Pty Ltd v Management Services Australia Pty Ltd (t/as Peak Performance PM) [2018] NSWCA 168 at [39]. This is not intended as more than an observation that the costs consequences usually fall on the parties to the litigation or that such an order is outside of the ordinary run of cases where parties pursue or defend claims for their own benefit and at their own expense - see: Dymocks Franchise Systems (NSW) Pty Ltd v Todd (No 2) [2004] UKPC 39; [2005] 4 All ER 195 at [25]; KSMC Holdings at [44]; Skelin at [19]. It is, accordingly, not particularly helpful to state that a third party costs order is rare and exceptional. When there is a sufficient connection between the litigation and a third party, and the circumstances are such that the making of a costs order is fair in all the circumstances, the making of a third party costs order is normal. Certainly, it is not exceptional to order costs against a litigation funder who facilitates litigation for their own commercial gain. Indeed, this has become increasingly common. As Hammerschlag J said in Mistrina Pty Ltd v Australian Consulting Engineers Pty Ltd - Costs [2020] NSWSC 633 at [26]:

[52]

... Dymocks was decided 16 years ago. Litigation funding is much more common now than it was then. It is an everyday feature of cases in this [Technology and Construction] List and the Commercial List in all types of claims, not only class actions. Applications of the present type are even less exceptional now than they were then.

There are many cases which recognise the fairness in ordering a party who funds litigation for their own commercial benefit to pay, if they fail, the successful party's costs. This is so whether or not the funder has given an indemnity for the costs ordered against an unsuccessful applicant. Examples include: Dymocks; Carborundum Abrasives Ltd v Bank of New Zealand (No 2) [1992] 3 NZLR 757; Gore v Justice Corp Pty Ltd [2002] FCAFC 83; 119 FCR 429; Mistrina. In Dymocks at [26], the Privy Council quoted from the unreported judgment of 19 May 2000 of Fisher J of the High Court of New Zealand in Arklow Investments Ltd v McLean at [21]:

... [I]t is wrong to allow someone to fund litigation in the hope of gaining a benefit without a corresponding risk that that person will share in the costs of the proceedings if they ultimately fail.

In the context of ordering security for costs against a non-party, Hodgson JA observed in Green v CGU Insurance Ltd [2008] NSWCA 148; 67 ACSR 105 at [51] that "the court system is primarily there to enable rights to be vindicated rather than commercial profits to be made" and that "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". Those observations are equally applicable to the present circumstances.

The beginning and end point is the terms of s 43 of the FCA Act. The power to order costs is discretionary. It must be exercised judicially, not arbitrarily or capriciously or on grounds unconnected with the litigation, having regard to relevant principle and the justice of the case in all the circumstances: Minister for Immigration, Citizenship, Migrant Services and Multicultural Affairs v Mukiza [2022] FCAFC 105 at [4].

[58]

Although the High Court's reasons were addressing the position in relation to an unsuccessful party that was impecunious, the essential point made by their Honours is not undermined merely because the inverse position prevails where the unsuccessful party is not impecunious. The making of a costs order creates a liability and, thereby, a debt where one otherwise does not exist. That is to the benefit of the successful party as that party is better off having the benefit of a right to enforcement of that debt than without it. That reasoning is equally applicable in the context of litigation that has been funded by a third-party. The making of a third-party costs order secures to the benefit of the successful party a debt as against a third-party that has funded the litigation, irrespective of whether the unsuccessful party is impecunious or not. At least one benefit derived from the creation of such a debt in favour of the successful party is a right of direct recourse as against the third-party funder for recovery of its costs. It may avoid the need for enforcement action to be taken as against the unsuccessful party or seeking to enforce an undertaking proffered by the unsuccessful party to call on an indemnity as between it and the third-party funder (being rights which are not assigned to the benefit of the successful party nor (on the facts here) capable of subrogation). In the context of complex commercial litigation, where there may be prospects of appeals and applications for a stay of costs orders in the meantime, the creation of the debt against the third-party gives some certainty to the successful party that it has the benefit to ultimately enforce costs orders against both the unsuccessful party and its funder depending on the circumstances as they come to prevail. None of this requires a finding that these are eventualities that will in fact come to pass, but explains the rationale for why a discretion may be exercised judicially to order costs against a third-party funder. As the Court explained in Sangere, the benefit of an order for costs is a valuable right.
The above analysis is consistent with the essential rationale for the recognition of a category of case where Courts may exercise their discretion to make a costs order against a third-party funder. That rationale involves recognition that the civil system of justice in the common law tradition involves the resolution of the competing legal interests of the parties to litigation. It ordinarily involves one or other party seeking a vindication of their rights. It is not the primary purpose of civil litigation to facilitate the making of a commercial profit for a stranger to the litigation: Green v CGU Insurance Ltd [2008] NSWCA 148; 67 ACSR 105 at [51] (Hodgson JA; Basten and Campbell JJA agreeing, including for additional reasons). LCM is a commercial litigation funder. As Thawley J stated in Hardingham v RP Data Pty Limited (Third Party Costs) [2023] FCA 480 at [26], litigation funding is "a legitimate and commonplace commercial activity" and one obvious risk is that the litigation funder may become liable to pay the successful parties' costs irrespective of whether the funder has agreed to indemnify the unsuccessful party or not. Having played itself into the stakes of the litigation by funding it, I see no principled reason why in the proper exercise of judicial discretion on the facts here that LCM should escape an order that it bear the liability for costs. I am satisfied that LCM should be liable for the Respondents' costs jointly and severally with the Davis Applicants.
In coming to the conclusion that LCM should be liable for costs, I take into account the fact that it did more than merely fund the litigation for the prospect of commercial gain. Rather, it took an active role in the litigation, including by its involvement in claim being devised by lawyers and experts that it retained, and by agreeing to exercise a high degree of control in the conduct of the litigation including its right to direct the prosecution of the Davis Applicants' claims. As noted, the Scheme Rules governed the "Scheme" that was participated in by LCM and the Davis Applicants. LCM's role in the litigation was established by r 22 of the Scheme Rules, with r 22.3 providing that LCM "Will direct the steps to be taken, or not taken, in preparing, conducting, abandoning, postponing or resolving the Claims".
I do not accept LCM's contention that it is only in "exceptional circumstances" that a costs order would be made against a funder where the unsuccessful party is in a position to meet an adverse costs order. As an initial point, it may be observed that this contention over-simplifies the true position. The unsuccessful parties here, the Davis Applicants, are only in a position to meet the liability arising from an adverse costs order by reason of an indemnity granted to them by LCM. It was not suggested that the Davis Applicants would otherwise be in a position to meet the adverse costs order and the fact that they did not provide security for costs themselves tells against that suggestion. The uncontested evidence before me was that it was LCM that provided security by way of procuring deeds of indemnity when the Davis Applicants were met with applications for security for costs.
Further, the Full Court's statement in Dunghutti at [91] that "An order for costs against a non-party where the unsuccessful party is in a position to meet an order for costs would only be made in exceptional circumstances" is to be considered in the context of the facts in play there. That was not a case that involved litigation funding. It was a case where the successful respondent to an appeal submitted that the directors of the unsuccessful corporate appellant be ordered to pay the costs of the appeal (instead of the corporate appellant itself). It was a peculiar case, and a peculiar argument. It is unsurprising that in the context of that case, the Full Court reasoned that it would be an exceptional circumstance that would lead the Court to making costs orders against the directors of the corporate appellant when that corporate appellant was not impecunious. The Full Court also observed at [90] that an order for costs against a non-party is only made in exceptional circumstances. However, as Thawley J cogently explained in Hardingham at [21], the reference to exceptional circumstances "is not intended as more than an observation that the costs consequences usually fall on the parties to the litigation or that such an order is outside of the ordinary run of cases where parties pursue or defend claims for their own benefit and at their own expense" and "accordingly, not particularly helpful to state that a third-party costs order is rare and exceptional".
Whatever may have been the position in a bygone era, there is a relative ubiquity to litigation funding. Again, as Thawley J pointed out in Hardingham at [21]-[22]:

Davis v Wilson

At a glance

Court

Decision date

Before

Source

Judgment (144 paragraphs)

Parties

Legislation Cited (6)

Cases Cited (2)