Jurisdiction - Australia
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Australia – Security For Costs In Class Actions.

11 September, 2013

 

Legal News & Analysis – Asia Pacific – Australia – Dispute Resolution

 

The Full Federal Court recently ordered in Madgwick v Kelly [2013] FCAFC 61 that the applicants in three related class actions provide security for the costs of the respondents. The decision is particularly significant as the applicants are individuals without backing from litigation funders. Some of the factors that the Court took into account in reaching its conclusion are discussed below.

 

Evidence of willingness or ability to contribute to security 

 

One relevant consideration is whether the making of an order for security would stifle the proceedings. The applicants bear the onus of proof in this regard.

 

The Court’s decision highlights the types of evidence that the Court will consider in relation to the question of stifling. It demonstrates that applicants must provide evidence of the financial circumstances (such as assets) of those persons who stand to benefit from the proceedings in determining those persons’ ability to contribute to security. As Justice Jessup emphasised, such evidence is necessary to enable the Court to objectively assess such persons’ ability to contribute to security. Justice Jessup was critical of the survey conducted by the applicants’ solicitors of 50 of the 409 known group members. His Honour considered that the questions were ‘intensely subjective’ and not calculated to elicit information about the financial circumstances of the 409 known group members.

 

Justice Jessup also noted that, in relation to the issue of stifling, the applicants did not need to provide evidence of the financial circumstances of unknown group members.

 

The Court nevertheless confirmed that the unwillingness of persons who stand to benefit from the proceedings to contribute to security for costs is of relevance, though not in itself determinative. The reasonableness of any unwillingness must also be considered.

 

Availability of litigation funding 

 

The Court held that the availability of litigation funding is relevant to whether the litigation is likely to be stifled by an order for security. There was no evidence at first instance as to the availability of litigation funding, except that none was on foot. The Court held that, in the absence of evidence of the availability of litigation funding, it is not possible to hold that the provision of security would stifle the proceedings. Chief Justice Allsop and Justice Middleton warned, however, that they should not be taken as promoting a rule that applicants should always seek to obtain litigation funding to avoid an order for security.

 

Lawyers acting under conditional costs agreements

 

The Court also considered whether the applicants’ solicitors were ‘standing behind’ the applicants or would benefit from a successful outcome, such that they could be taken into account as persons being reasonably required to contribute to a fund to service the respondents’ costs. The applicants’ solicitors were acting pursuant to a conditional costs agreement and the respondents had argued before the primary judge that the applicants’ solicitors therefore stood behind the litigation or stood to benefit from the litigation. Both the primary judge and Full Court rejected the respondents’ argument. The Full Court affirmed the primary judge’s finding that a lawyer acting under a conditional costs agreement should be distinguished from a litigation funder and should not be required to contribute to a fund for the costs of the other side of the litigation.

 

Balancing the competing policy considerations

 

The Court also held that the primary judge erred by:

 

  1. failing to engage in the balancing exercise between the policy of s 43(1A) of theFederal Court of Australia Act 1976 (Cth) (FCCA) (that is, the immunity of group members in a representative action from costs), and the risks of injustice to a respondent in having no real capacity to recover the costs of successfully defending the litigation, and
  2. wrongly concluding that an order for security would undermine the protection provided for under s 43(1A) of the FCCA.

 

The Court remitted the matter to the primary judge to fix the amount and form of security.

 

 

For further information, please contact:

 

Damian Grave, Partner, Herbert Smith Freehills
[email protected]

 

Jason Betts, Partner, Herbert Smith Freehills
[email protected]

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