- The Federal Court of Australia has held that third party litigation funders can be ordered to pay security for costs directly.
- The Court confirmed that third party litigation funders can be exposed to an order for adverse costs and an order for security for costs in ‘no costs’ jurisdictions such as that established under the Fair Work Act 2009 (Cth).
The Australian class actions landscape has recently seen a spike in the number of employment law-related class actions. At last count, there are 11 class actions in the Federal Court of Australia where breaches of the Fair Work Act 2009 (Cth) (‘FW Act’) form the basis of proceedings. Many arise from the similarity of facts – most notably the alleged mischaracterisation of causal employees. Others involve sham contracting arrangements and the interpretation of collective instruments.
In each of them, however, one of the attractions for commercial litigation funders was the perceived ‘no costs’ jurisdiction of the FW Act. While in other jurisdictions, litigation funders are typically required to front up security for costs on behalf of claimants, it was thought that the no-costs jurisdiction of the FW Act not only relieved funders from the risk of an adverse costs order, but also protected them from a security for costs order.
However, the recent decision of the Honourable Justice Lee in Turner v Tesa Mining (NSW) Pty Ltd  FCA 1644, has thrown aside the costs immunity typically associated with FW Act matters insofar as third party litigation funders are concerned. In the decision, which is subject to an application for leave to appeal, Justice Lee ordered security for costs directly against a litigation funder, finding that the presumption in the FW Act against cost orders should not extend to third parties using these claims for perceived commercial advantage.
Turner v Tesa Mining (NSW) Pty Ltd concerned applications for security for costs made in two representative proceedings, being case-managed together. The proceedings were commenced by the applicant against two labour-hire companies who had been engaged to supply labour for the Mount Arthur Coal Mine. The applicant alleged, on his own behalf, and on behalf of the group members in each proceeding, that the labour-hire companies committed breaches of the FW Act by withholding certain entitlements from employees on the basis that they were casual, rather than permanent employees. Both proceedings have been funded by Augusta Ventures Limited (the ‘Funder’).
The respondents brought applications for security for costs in the amount of $3.1 million across both proceedings. The orders sought were pressed only against the Funder directly.
In funded representative proceedings it is typically accepted the applicant will provide security in some form. However, a contest about security arose in these proceedings for two reasons. First, the security was sought directly against the Funder, rather than the applicant. Secondly, the proceedings concern claims under the FW Act – usually understood to be a ‘no costs’ jurisdiction, by virtue of s 570 of the FW Act.
Section 570 of the FW Act relevantly provides that a party to a proceeding arising under the FW Act may be ordered to pay the costs incurred by another party to the proceeding only if the proceeding has been instituted vexatiously, or the party has acted unreasonably in the conduct of the litigation. That is, the general rule that costs follow the event is displaced. In the context of an order for security for costs, which is made where there is doubt as to whether an adverse costs order could be met by an applicant, the absence of a material risk that costs will be payable removes the need to secure the risk. No risk of costs, no need for security for such costs.
In considering whether security ought to be granted against the Funder in this case, Justice Lee considered two threshold questions: first, whether the Federal Court has the power to order security for costs directly against a third-party litigation funder; and secondly, if such power exists, whether that power ought to be invoked in circumstances where a ‘no costs’ regime applies.
Does the Court have the power to award security directly against a non-party funder?
In support of their argument that security for costs should be ordered against the Funder, the respondents submitted that:
- a general rule has developed in funded litigation which typically requires funders to pay the adverse costs of the other parties, where they have been unsuccessful in prosecuting the funded party’s claim; and
- on that basis, security for the Funder’s potential costs exposure ought to be provided by the Funder.
His Honour declined to find that a general rule has developed which permits a court to order adverse costs directly against a funder where the funded litigation is unsuccessful. Rather, the discretionary power to award costs against non-parties to litigation is a broad one, to be exercised on the basis of what is just in all the circumstances of the individual case.
Importantly, his Honour found that the terms of s 570 of the FW Act do not, in principle, impose similar constraints on courts awarding costs against third party funders in the Fair Work jurisdiction, as they do in respect of parties to the proceeding. As a consequence, his Honour concluded the FW Act leaves the question of whether security should be ordered to the existing powers and procedures of the Federal Court.
The question then became whether the Federal Court had power to order security for costs against the Funder (as opposed to the applicant in the proceedings).
Contrary to the position in England and Wales, there is no express power enabling the Federal Court to order security for costs against a third party to proceedings. The Funder submitted the Court’s only power to order security is that contained in s 56 of the Federal Court of Australia Act 1976 (Cth) (‘Federal Court Act’). Given that provision expressly applies to a party to the proceeding, it would be beyond power for the Court to order security directly against the non-party Funder.
His Honour did not accept that submission and instead identified the broad power conferred on the Court under s 33ZF of the Federal Court Act to make any order it thinks appropriate to ensure that justice is done in the proceeding as a sufficient basis to grant security against a non-party. In doing so, his Honour noted: ‘there is nothing about the text and context of s 33ZF which demands a conclusion that the Court cannot order security against a non-party when thought to be appropriate or necessary to ensure that justice is done in a class action’ (at ).
Further, his Honour also concluded that the implied powers of the Court, to do all that is necessary for the proper function of the Court, would be a sufficient basis on which to ground the power to order security for costs against a non-party. In his Honour’s view, neither s 570, nor any other section of the FW Act, qualifies either the statutory or implied power to grant security for costs against a non-party funder.
Should the discretion to order security be exercised?
Having found that the Court has the power to order security for costs against the Funder, his Honour was required to consider whether, in the circumstances, the discretion ought to be exercised. The Funder advanced two principal arguments against the exercise of the discretion in this case.
First, the Funder submitted it would be inappropriate to award security in a ‘no costs’ jurisdiction. His Honour did not find that ground particularly persuasive. In doing so, his Honour referred to the policy consideration that access to justice ought to be ensured in Fair Work matters. His Honour described s 570 of the FW Act as having ‘the effect of safeguarding the ability of an applicant, a person often with a modest claim facing the spectre of an intimidating inequality of arms, to bring an action freed from the vexation that an adverse costs order could mean financial ruination’ (at ).
Such policy considerations do not extend to litigation funders whose interest is to make a commercial profit from the litigation.
Second, the Funder argued it would be inequitable to award security where the Funder is unlikely to be able to recover costs against the respondents should the litigation be successful. While his Honour was more persuaded by this submission, he did not consider it to be decisive in this case, finding that such risks can be factored into the price of the provision of funding.
His Honour also considered a number of other discretionary factors. One factor weighing in the balance against making an order was that the cost of providing security will ultimately be borne by the group members, like all funding costs. However his Honour concluded this was an inevitable consequence of the way in which the litigation was funded, and the bargain struck by the group members. Interestingly, his Honour made clear that had the proceedings been an unfunded class action where group members were bearing the costs, or if the solicitors were working on a speculative basis, it would not be appropriate to exercise the discretion to award security for costs against the applicant.
On balance, his Honour found that security for costs against the Funder ought to be awarded and his Honour will now consider arguments as to the appropriate form of security to be granted.
This decision is significant in that it is the first time the Court has found it has the power to order security for costs directly against a third-party fund. Further, it confines the benefit of the ‘no costs’ regime under the FW Act to the parties. His Honour found that funders who fund litigation for a commercial benefit can be liable for adverse costs and an order for security despite the proceedings being brought in a ‘no costs’ jurisdiction.
The Funder in this case has sought leave to appeal the decision. As such, its ramifications remain to be seen. As it stands, the decision removes a benefit that litigation funders would have seen in Fair Work class actions. However, given his Honour’s comments that the discretion would not be exercised in a similar way if the litigation were being funded by unions or lawyers acting on a speculative basis, the spectre of further Fair Work class actions continues to loom large.