C.1 Costs against Funders
20 At the heart of the applications the Funder provide security, is a submission made by Mt Arthur Coal, that a rule has developed which provides that funders are usually required to pay adverse costs in unsuccessful funded litigation. The supposed existence of such a rule is used as a springboard to the further submission that if the Funder may be required to pay adverse costs, then security for this potential obligation ought to be ordered against the Funder.
21 For reasons that hopefully will become obvious, it is worth starting an examination of the law relating funders, adverse costs and the provision of security by funders, by initially considering a somewhat different point: the relevance of the existence of a funder to the question as to whether security should be ordered against a party, including a party, which in unfunded litigation, is generally not required to put up security.
22 As Young CJ in Eq in Chartspike Pty Ltd v Chahoud [2001] NSWSC 585 observed at [5], where a plaintiff contracts to have the litigation funded by a third party, in return for the third party receiving a share of the verdict, "it is appropriate that the third party bear part of the risk".
23 In Green (as liquidator of Arimco Mining Pty Ltd) v CGU Insurance Ltd [2008] NSWCA 148; (2008) 67 ACSR 105 at 120-121 [51] Hodgson JA observed that 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". His Honour went on to note that although litigation funding is not now contrary to 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.
24 The comments were repeated at 122 [61] and Campbell JA agreed at 128-129 [85]-[88]. Although Basten JA observed at 127 [80] that:
The presence of litigation funding may justify a new approach to the basis on which orders for security are made with respect to individual plaintiffs, or to the way in which liquidators suing personally are to be treated. While the issue arises in respect of practice and procedure within the court, the approach proposed by the respondent involves departure from, rather than extrapolation of, existing authority. It raises an issue which calls for a uniform approach across jurisdictions and would better be addressed in the broader context of the regulation of commercial litigation lending. Such consideration will need, among other things, to define with some precision what is a "litigation funder".
25 Rares J endorsed the sentiments of Hodgson JA in Canberra Residential Developments Pty Ltd v Brendas [2009] FCA 745 at [21]; so too did Ward JA in Ballard v Brookfield Australia Investments Ltd [2013] NSWCA 82 at [59]-[60]. To similar effect were the observations by Gleeson J in Austcorp Project Number 20 Pty Ltd v LM Investment Management Ltd (in liq) [2014] FCA 1371 at [34], where her Honour observed that the "presence of a litigation funder is a powerful factor in favour of the grant of security" against an applicant; and this point was also made in Domino's Pizza Enterprises Limited v Precision Tracking Pty Ltd (No 2) [2017] FCA 211, where Robertson J at [75] noted that the presence of a litigation funder was a factor militating in favour of the grant of security against a moving party.
26 The focus on the funder as a person who will derive a benefit from the litigation and the relevance of this fact to the provision of security by an applicant can be seen as a particular reflection of a broader, well-known principle relevant to stultification. As the Full Court explained in Bell Wholesale Co Ltd v Gates Export Corporation (1984) 2 FCR 1 at 4:
… 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 (whether they be shareholder or creditors or, as in this case, beneficiaries under a trust) are also without means. It is not for the party seeking security to raise the matter; it is an essential part of the case of a company seeking to resist an order for security on the ground that the granting of security will frustrate the litigation to raise the issue of the impecuniosity of those whom the litigation will benefit and to prove the necessary facts.
27 It is next useful to consider the circumstances where a funder will be liable to pay adverse costs if funded litigation is unsuccessful. The first and most obvious way liability arises is pursuant to an agreement with the funded party whereby the funder agrees to meet any adverse costs ordered against the funded party, where those costs were incurred during the term of the funding agreement. The second way, common in the case of common fund orders, is where the funders provide an undertaking to the Court (or sometimes directly to a respondent) to pay any adverse costs directly. In both these circumstances, funders also invariably agree to provide any security for costs ordered against the funded party.
28 It is the third circumstance which is of present importance: the discretionary power to award costs against non-parties to litigation, where it is in the interests of justice to do so. It is convenient to commence discussion of this circumstance by noting that it is commercial considerations that inform the provision by funders of protection against adverse costs; it is not necessary to provide an indemnity to prevent a finding of abuse of process. Despite an earlier indication to the contrary (Project 28 Pty Ltd (Formerly Narui Gold Coast Pty Ltd) v Barr [2005] NSWCA 240 at [121]), this is evident from the decision of the High Court in Jeffery & Katauskas Pty Limited v SST Consulting Pty Ltd [2009] HCA 3; (2009) 239 CLR 75.
29 The submission of the appellant in Jeffery & Katauskas was that it amounted to an abuse of process for a non-party with a commercial interest in the fruits of the litigation to fund proceedings by an insolvent plaintiff without indemnifying the plaintiff against an adverse costs order. This contention depended upon one of two arguments being accepted: (a) a general proposition condemning the funding for reward of another's litigation (a proposition rejected in Campbells Cash and Carry Pty Limited v Fostif Pty Limited [2006] HCA 41; (2006) 229 CLR 386); or (b) a proposition that, despite the provisions and principles governing security for costs, and despite the then New South Wales Supreme Court rules' general prohibition against ordering costs against non-parties, those who fund another's litigation for reward must agree to put the party who is funded in a position to meet any adverse costs order: at 98 [42]. This second proposition was rejected (at 98 [43]) as being too broad as it would apply also to shareholders who support a company's claim, relatives who support an individual plaintiff's claim and banks who extend overdraft accommodation to a corporate plaintiff. Additionally, the majority (French CJ, Gummow, Hayne and Crennan JJ) considered that the proposition had no doctrinal root, and that it depended on circular reasoning because it sought at 98 [43]:
…to take general principles about abuse of process (and in particular the notion of "unfairness"), fasten upon a particular characteristic of the funding arrangement now in question, and describe the consequence of that arrangement as "unfair" to the defendant because provisions and principles about security for costs have been engaged in the case in a particular way and the rules will not permit the ordering of costs against the funder unless the principles of abuse of process are engaged.
(emphasis added)
30 The rules considered by the High Court in Jeffery & Katauskas do not reflect the current position of the rules in New South Wales nor in other superior courts, which confer the power to make non-party costs orders generally. In Knight v FP Special Assets Limited (1992) 174 CLR 178, the High Court rejected the argument that save for well-recognised exceptions, no such power existed. The High Court found that there are a variety of circumstances in which considerations of justice may, in accordance with general principles relating to awards of costs, support an order for costs against a non-party; the necessity being that the discretion to make such non-party costs orders was to be exercised judicially and in accordance with general legal principles pertaining to the law of costs: at 192 (Mason CJ and Deane J). One general circumstance in which security for costs should be ordered was said to be where the applicant was insolvent or a "man of straw", the non-party has played an active party in the conduct of the litigation and the non-party has an interest in the subject of the litigation: at 192.
31 A relevant application of this principle was in Gore v Justice Corporation [2002] FCAFC 83; (2002) 119 FCR 429, where the Full Court (O'Loughlin, Whitlam and Marshall JJ) ordered a funder to pay adverse costs incurred from the date on which the funder commenced funding the applicant's case. The respondent was aware that the funder had initially agreed to pay the applicant's costs of litigating the assessment of damages it was owed by the respondent (the applicant having succeeded on liability at trial) and to meet the respondent's costs, if the applicant was unsuccessful. The applicant was subsequently ordered to pay the respondent's costs on appeal and could not pay. Three days before the hearing on the appeal the funding agreement was "cancelled" and replaced with a "loan agreement" absent an obligation on the funder to pay adverse costs. The loan agreement was not disclosed until after the publication of the Full Court's reasons for judgment, when the respondent sought its costs from the funder. The Court held the funder liable to pay that part of the respondent's costs that related to the period of funding, and at 452 [64] observed that if the applicant:
…had been successful there was every likelihood that there would have been a costs order against [the respondent], thereby recouping to [the funder] much of what it had outlaid… It seems to us, as a logical consequence of these circumstances, that in return for the chance of obtaining eight per cent of the judgment debt and a recoupment of much of its outlay for costs, [the funder] should be expected to incur the risk of a costs order in the event of [the respondent] being the successful party. Reaching that conclusion is made easier because of the provision in the Litigation Agreement under which [the funder] agreed with [the applicant] that it would pay [the respondent]'s costs in the event of [the applicant] losing the case. That factor should not, however, be treated as being the catalyst for the Court arriving at its decision. It was a matter of great significance that the existence of this clause was made known to [the respondent] but it was still only one of the factors that has led this Court to its conclusion.
32 Similarly, and despite the restrictions in the then applicable rules of court relating to third party costs orders, in Fostif Pty Limited v Campbells Cash and Carry Pty Limited (2005) 63 NSWLR 203 at 230 [120] Mason P (with whom Sheller JA agreed and Hodgson JA relevantly agreed), observed that respondents "may obtain special costs orders against funders if proceedings fail".
33 The position in the United Kingdom relating to cost orders against funders is developing but not substantively different. Since 2005, in Arkin v Borchard Lines Ltd (Nos 2 and 3) [2005] EWCA Civ 655; [2005] 1 WLR 3055, the Court of Appeal made it clear that a funder can be liable for adverse costs. However, in that case, the Court restricted the funder's total liability to the overall funding it provided, a limitation on the application of the principle that came to be referred to as the "Arkin cap". Most recently the Arkin Cap was considered in Davey v Money [2019] EWHC 997 (Ch).
34 Davey concerned the liability of a litigation funder against whom a non-party costs order was sought. The order was unopposed, but the funder contended its total liability should be limited in accordance with the Arkin cap. Mr Justice Snowden found that the Arkin cap was not "a rule to be applied automatically in all cases involving commercial funders" (at [89]); this was said to be consistent with the broader principle as established by the Privy Council in Dymocks Franchise System (NSW) Pty v Todd [2004] UKPC 39; [2004] 1 WLR 2807 at 2815-2816 [25], that a non-party costs order is ultimately a matter of discretion to be exercised on the basis of what is just in all the circumstances of any individual case.
35 The advice of the Privy Council in Dymocks, an appeal by leave from the New Zealand Court of Appeal, is of some importance. It was a case where the Judicial Committee held that a litigation funder, which was joined, should pay the costs of the appeals where the respondents were unable to do so. Lord Brown (speaking for the Judicial Committee) distinguished the position of, on the one hand, a "pure funder" who had no personal interest in the litigation and did not stand to benefit from it or seek to control it, which would not generally be the subject of an order for costs, and, on the other hand, a non-party that either substantially controlled or at least stood to benefit from the litigation and was promoting and funding litigation for its own financial benefit: at 2815-2816 [25]. Having been taken by counsel to various United Kingdom, New Zealand and Australian authorities (including Knight v FP Special Assets Limited), the principles that informed the exercise of the discretion were examined at 2814-2818 [23]-[29]. At [25], the following summary of the relevant principles from these cases was provided by their Lordships, which included:
(1) Although costs orders against non-parties are to be regarded as "exceptional", exceptional in this context means no more than outside the ordinary run of cases where parties pursue or defend claims for their own benefit and at their own expense. The ultimate question in any such "exceptional" case is whether in all the circumstances it is just to make the order. It must be recognised that this is inevitably to some extent a fact-specific jurisdiction and that there will often be a number of different considerations in play, some militating in favour of an order, some against.
(2) Generally speaking the discretion will not be exercised against "pure funders", described in paragraph 40 of Hamilton v Al Fayed as "those with no personal interest in the litigation, who do not stand to benefit from it, are not funding it as a matter of business, and in no way seek to control its course". In their case the court's usual approach is to give priority to the public interest in the funded party getting access to justice over that of the successful unfunded party recovering his costs and so not having to bear the expense of vindicating his rights.
(3) Where, however, the non-party not merely funds the proceedings but substantially also controls or at any rate is to benefit from them, justice will ordinarily require that, if the proceedings fail, he will pay the successful party's costs. The non-party in these cases is not so much facilitating access to justice by the party funded as himself gaining access to justice for his own purposes. He himself is "the real party" to the litigation, a concept repeatedly invoked throughout the jurisprudence - see, for example, the judgments of the High Court of Australia in the Knight case and Millett LJ's judgment in Metalloy Supplies Ltd v MA (UK) Ltd. Consistently with this approach, Phillips LJ described the non-party underwriters in TGA Chapman Ltd v Christopher as "the defendants in all but name". Nor, indeed, is it necessary that the non-party be "the only real party" to the litigation in the sense explained in the Knight case, provided that he is "a real party in ... very important and critical respects". Some reflection of this concept of "the real party" is to be found in CPR 25.13(2)(f) which allows a security for costs order to be made where "the claimant is acting as a nominal claimant".
(emphasis added, citations omitted)
36 From this, the submission made on behalf of Mt Arthur Coal before me was that a rule has developed which means that funders are usually required to pay any adverse costs of unsuccessful, funded litigation.
37 Care must be taken to avoid elevating specific decisions as to practice and procedure issues which may arise in one case as if they "were determinative of precepts and principles of general application": see Regent Holdings Pty Ltd v State of Victoria [2012] VSCA 221; (2012) 36 VR 424 at 429 [19] (Nettle, Redlich and Osborn JJA). Hence one must be cautious about being definitive as the circumstances in which an adverse costs order will be made (including against a non-party). This caution against over-generalisation is consistent with s 43 of the Act giving the Court a very wide discretion as to costs tempered only by the requirement to act judicially and the mandatory requirements, contained in s 37M(3) that any practice and procedure power, including the power to award costs, must be exercised or carried out, in a way that best promotes the overarching purpose and the more specific requirement, in s 37N(4), that in exercising a discretion to award costs, the Court must take into account any failure of a party or their lawyer to comply with the overarching purpose.
38 That said, the arrangements pursuant to which litigation is funded often, but not invariably, have common characteristics. I posed and then answered the question of how these arrangements, pursuant to which funded proceedings are usually brought, should be characterised in Perera v GetSwift Limited at 11 [17] by noting:
…(t)he superficial answer was simply as a means by which a proceeding governed by Part IVA of the Act could be conducted to the benefit of group members, the funder and the solicitors. A more complex answer was provided by the Full Court in Brookfield Multiplex Ltd v International Litigation Funding Partners Pte Ltd [2009] FCAFC 147; (2009) 180 FCR 11, where the majority (Sundberg and Dowsett JJ) found that the bilateral (or, with the solicitors, trilateral) arrangements pursuant to which these funded class actions were conducted were unregistered managed investment schemes for the purposes of the Corporations Act 2001 (Cth). A majority of the Full Court held that the class action (or, more particularly, the scheme constituted by the agreements which allowed the class action to be funded and maintained) had the following characteristics: (a) the promises given by the group members and the funder were 'money's worth' contributed for the purposes of the litigation funding arrangement made in return for their acquiring rights to share in any judgment sum, and the benefit of the funder's promises to meet legal costs; (b) the opportunity to prosecute a claim, with virtually no exposure to any costs or outgoings in the event of failure, was a benefit accruing to group members produced as a result of all parties carrying out their obligations under the scheme and that a successful prosecution of those claims would yield financial benefits to group members, the funder and, indirectly, the solicitors; (c) the pooling of contributions, which was effected by the group members making their individual promises available for the purposes and benefit of the scheme and, ultimately, for the funder's benefit; (d) the litigation funding arrangement was a common enterprise in that there was a shared purpose of pursuing group members' claims successfully that would then benefit the group members, the funder and the solicitors.
39 If the arrangements are of this type, and the common enterprise founders, as a matter of principle, there is something to be said for the notion that justice should ordinarily require that the costs of a successful party occasioned by the litigation, should be borne by those who were seeking a reward from the success of the common enterprise. But any such principle cannot be right at this level of generality.
40 For a start, some participants in the common enterprise, group members, have a specific statutory protection contained in s 43(1A) of the Act, preventing them from being subject to an adverse costs order subject to identified exceptions. Moreover, in most cases, where there is a costs indemnity given to a party by a funder, this will mean it is unnecessary to make an order against both the party with the benefit of the indemnity and the funder. What makes this case unusual, is that in a "no costs" jurisdiction, the statutory protection against adverse costs usually only enjoyed by a group member extends (absent identified exceptions) to the funded party to the proceeding by reason of s 570 of the FW Act. As a matter of principle, however, there does not appear to me to be any reason why these specific statutory protections are of broader application or assume decisive importance. The issue here can be summed up as being whether the co-venturer who has provided the funds for the common enterprise in the hope of securing a reward upon success, should ordinarily be required to pay adverse costs, if the common enterprise fails?
41 Despite the caution I express above about being too definitive as to the likely exercise of a broad and fact dependent discretion, it seems to me that when: (a) there is funded litigation which can be characterised as a common enterprise; and (b) there is a statutory fetter on making an award of costs against the funded party (or an award of costs against the funded party will be inutile); and (c) according to usual costs principles an award of costs should otherwise be made in favour of a successful party, then there is no reason in principle why an adverse costs order should not be made directly against the funder of the unsuccessful funded litigation. This reflects the characterisation of the position by the Privy Council in Dymocks that the funder is not so much facilitating access to justice by the funded party as itself gaining access to justice for its own purposes.