Mt Arthur Coal Pty Ltd (MAC) has successfully obtained security for costs orders against the litigation funder in the twin labour-hire class actions it is currently defending. His Honour Justice Lee of the Federal Court made orders on 8 October 2019 – described as ‘landmark’ by sections of the press – requiring Augusta Ventures Limited (the Funder) to furnish security for costs. The decision is significant as it is the first time in Australia that a litigation funder has been ordered to pay security for costs directly (as opposed to an applicant providing the security, but the litigation funder footing the bill). The precise form of security is to be determined at a later hearing.
The Applicant alleges in the proceedings that two labour-hire firms which supplied labour at the MAC mine, TESA and Chandler Macleod, incorrectly classified certain employees as casual, rather than permanent, and withheld employee entitlements in breach of the Fair Work Act 2009 (Cth) (FW Act)
Proceedings of this type formed only 3.4% of class actions filed between 1992 and 2018 in Australia. The last year, however, has seen 11 class actions alleging breaches of the FW Act in the Federal Court. Four of these are funded by Augusta.
Orders requiring applicants to provide security for costs where there is a commercial litigation funder behind the action have been commonplace for many years.
Industrial class actions have apparently appealed to litigation funders for a number of reasons, including because s570 of the FW Act largely precludes adverse cost orders against an unsuccessful party (which reduces the downside risk for a funder should it be unsuccessful, since it will not need to indemnify the applicant for that cost). Following Lee J’s decision, however, commercial litigation funders can no longer use s570 as a shield against security or adverse costs orders.
The Court’s Decision
As a starting point, Justice Lee noted that ordinarily there would be no dispute about whether the Applicant would have to provide security (as applicants typically are required to do so in funded class actions). This case was different, however, given the FW Act precludes (with limited exceptions) one party from recovering costs from the other in proceedings alleging a breach of that legislation.
Nonetheless, MAC argued that the Funder should be ordered to provide security (in the amount of $1m in each proceeding) on the following basis:
- It has generally been established under Australian law that the Court can make a costs order against third parties, including funders, where the applicant’s claim fails; and
- it follows logically that since the Court would have the power to make an adverse costs order against the Funder, it should also have the power to order the Funder to provide security for such costs.
Can funders be subject to an adverse costs’ orders under the FW Act?
Lee J ultimately declined to state definitively that funders would be ordered to pay costs in every unsuccessful class action where such an order against the applicant would be pointless or prohibited by statute (such as under the FW Act). His Honour, however, certainly acknowledged that such orders could be made.
Further, his Honour found that there was nothing in the terms of s570 of the FW Act that would otherwise restrict a Court’s power to make an adverse costs order directly against the funder of an industrial class action. His Honour explained that this section is intended to ensure that applicants who wish to bring a claim for breach of that Act are not deterred by the prospect of facing a prohibitive costs order should they be unsuccessful; but the section is not intended to protect a third party funder who has a purely commercial interest in the outcome of the litigation.
What is the source of the Court’s power to order security for costs against a funder?
Unlike in the United Kingdom, no statutory provision expressly grants the Federal Court power to order a funder (or another third party) to provide security for costs. The Funder argued that the Federal Court therefore has no such power. Justice Lee rejected that argument.
His Honour reasoned that the Funder’s argument was inconsistent with the nature and history of s33ZF the Federal Court of Australia Act 1976 (Cth) (FCA Act). That section bestows a broad power on the Court, when managing representative proceedings, “to make any order the Court thinks appropriate or necessary to ensure justice is done…” Justice Lee considered that the Court’s discretion under this section should not be restricted without good cause, and there was no persuasive reason why the powers of the Court under that section should not extend to requiring third parties (including funders) to provide security for costs.
Further Justice Lee did not rely just on the Court’s powers under s33ZF, but also found that the Court’s implied powers enable it to ward security against a non-party, including potentially a litigation funder (the Court’s implied powers being as are incidental and necessary to the exercise of the Court’s powers).
Should the Court exercise its discretion to grant security for costs?
Having established that the Court has the power to require a funder to provide security for costs, his Honour turned to two arguments raised by the Funder against his exercising that discretion in this case. Justice Lee was unpersuaded by both arguments.
- The Funder argued that a security for costs order would be inconsistent with the legislative intent underpinning s570 FW Act – that is, to institute a ‘no costs’ jurisdiction in order to promote access to justice. Again, his Honour found this argument was of little relevance to a funder that engaged in the proceedings for their “commercial advantage”.
- The Funder also submitted that it would be unfair for the Court to require it to provide security because no adverse costs order could be made against MAC in the future given it was protected by s570 FW Act (although, as discussed above, such an order could be made against the Funder). His Honour was unsympathetic to this argument. Justice Lee reasoned the Funder’s commission could be adjusted to account for cost of the security provided if a common fund order were later made. As to future industrial class actions, the market price of funding would adjust to account for this potential expense.
Justice Lee therefore found that it was appropriate to order to provide security in this case.
Where to now?
Justice Lee’s decision was not one against litigation funding per se. Instead, his Honour concluded that litigation funders who expect a commercial gain should be required to provide security (where such security cannot be obtained from the applicant, or to do so would be inappropriate).
It remains to be seen whether this decision in fact has the ‘chilling effect’ on industrial class actions predicted by some commentators, or whether security just becomes part of the pricing of funding. Providing security has not deterred funders from the funding of other class actions. Not having to incur that expense, however, would certainly have been one of the advantages that litigation funders felt industrial class actions had over other types of class actions.
As a result, it’s hard not to see Justice Lee’s decision at least forcing litigation funders to be more selective when choosing which industrial class actions they will fund, although it would not be surprising if litigation funders still decide to proceed in some cases.
It is also possible that we might see industrial class actions conducted without a funder, perhaps on a no-win no-fee basis or with some financial backing from the relevant union or the group members themselves.