Third Party Costs Order against Litigation Funder – “Not Motivated by Access to Justice”

In RP Hardingham v RP Data Pty Ltd (Third Party Costs) [2023] FCA 480, an award of third party costs, in part on an indemnity basis, was made against the applicants’ third party funder upon the claim being dismissed.  The applicants were impecunious.  Significantly the court was underwhelmed by the funder’s submissions that, despite the commercial nature of the funder’s activity, an order for costs ought not be made against it, or alternatively for indemnity costs, given that its funding afforded the applicants “access to justice”.   Thawley wrote:

[1]  This is an application by the respondent, RP Data Pty Limited for costs against a third party litigation funder, Court House Capital Pty Ltd. It has been made because RP Data was successful in the underlying proceedings and the applicants have not satisfied a costs order previously made. They are apparently impecunious.

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[18]  Section 43 of the Federal Court of Australia Act 1976 (Cth) (FCA Act) relevantly includes:

43. Costs

(1) The Court or a Judge has jurisdiction to award costs in all proceedings before the Court (including proceedings dismissed for want of jurisdiction) other than proceedings in respect of which this or any other Act provides that costs must not be awarded …

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(2) Except as provided by any other Act, the award of costs is in the discretion of the Court or Judge.

[19]  It is not in dispute that the power under s 43 extends to making costs orders against non-parties: Knight v FP Special Assets Ltd [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] .

[20]  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].

[21]  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]; Skelinat [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] :

… 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.

[22]  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.

[23]  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.

[24]  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 & Multicultural Affairs v Mukiza [2022] FCAFC 105 at [4] .

[25]  Court House is a commercial litigation funder which sought to profit from the principal proceedings. It funded the principal proceedings (but not the appeals) in return for 15% of any damages plus repayment of the funding it provided. Whilst it rather grandly submitted that its activities promoted access to justice, this is but a consequence of its commercial activities. I do not infer that Courts House’s activities were motivated by any concern for access to justice.

[26]  Litigation funding is a legitimate and commonplace commercial activity. One obvious risk for any commercial litigation funder is that, if the funded litigation is unsuccessful, the funder might face an application that it pay the successful parties’ costs. That risk arises whether or not it has agreed to indemnify the applicant against an adverse costs order. Court House decided to fund the principal proceedings in return for 15% of any damages obtained. As evidenced by the terms of cl 3 of the Funding Agreement referred to at [2] above, it is unrealistic to think that, in deciding to enter into the funding arrangement and on what terms, Court House did not appreciate and consider the prospect that it would be ordered to pay the respondent’s costs if the applicants were unsuccessful.

[27]  Court House submitted that the proper course was for RP Data to have applied for security for costs in the primary proceeding. Whilst that was an available course, I do not agree that it was the only course available, or that the failure to make such an application operates to deny the relief which RP Data seeks. When the proceedings were commenced, there was nothing to indicate that funding arrangements existed. The evidence on this application does not establish that there was any reason for thinking that either Mr Hardingham or REMA was impecunious at or around the time the proceedings were commenced. The applicants’ inability to meet the costs orders made on 17 December 2019 was at least partly due to a business downturn caused by the COVID-19 pandemic and the resulting lockdowns in early 2020: [2020] FCA 868 at [6] ; [2020] FCA 1062 at [20] .

[28]  RP Data cannot be criticised for not bringing an application for security for costs at or around commencement of proceedings in circumstances where: (a) the participation of a litigation funder was not known; (b) there was no grounds for suspecting an inability to meet an adverse costs order; (c) one of the applicants was an individual against whom an order for security for costs was unlikely to be successful even if he was impecunious; (d) the claims of the corporate applicant entirely overlapped with those of Mr Hardingham such that an order for security against REMA was also unlikely: Brecher v Barrack Investments Pty Ltd [2018] FCA 472 at [28] , [29] ; [2020] FCA 1062 at [9] . The applicants’ claim was genuine, even if adventurous. Indeed, it found favour with a majority of the Full Court.

[29]  The involvement of a litigation funder became known on 25 March 2019, two days before the mediation. By this time, the litigation had substantially progressed, including by RP Data joining REA by way of cross-claim. Although there was no evidence about this, RP Data submitted that it requested a copy of the Funding Agreement on 4 April 2019, after the mediation, but that its request was refused. Later correspondence suggests that the solicitors for RP Data assumed that the Funding Agreement included an indemnity for an adverse costs order. This was a false assumption. It appears to have been based on a review of Court House’s website.

[30]  It was not necessary to bring a security for costs application after the mediation in the circumstances. The bringing of such an application after the mediation would only have increased costs and delay. If an application had been made and the Court was inclined towards making an order, which it probably would have done taking into account such matters as were referred to by Hodgson JA in Green, I have no doubt that Court House would have given an undertaking to meet a costs order or taken some other course to enable the proceedings to continue, probably by renegotiating upwards its 15% fee. Court House has adduced no evidence on this application to suggest otherwise.

[31]  RP Data’s failure to make an application for security for costs after the mediation does not tell against ordering Court House to pay RP Data’s costs of the proceedings excluding the cross-claim.

[32]  Court House submitted that it would be “disproportionate to the degree of funding provided” to order Court House to pay costs, including on an indemnity basis from 11am on 28 June 2019. Its funding was described as “partial funding” and it was submitted that a costs order would “punish” Court House for “assisting impecunious applicants to bring proceedings of merit” and that it would therefore be “penal in nature”. I do not accept these submissions. The point is that Court House decided to fund the litigation for its own commercial gain. The litigation was ordinary commercial litigation from the perspective of Mr Hardingham and REMA. It was plain from a statement of the essential facts that the claim was one which might well fail. It is fair that the Court House also wears the risk in seeking to profit from the litigation. Its level of funding was substantial. The Funding Agreement provided for Court House’s participation in settlement. A representative of Court House attended the mediation. There was no evidence to suggest that it was not consulted in relation to the circumstances giving rise to the indemnity costs order and the terms of the Funding Agreement suggest that it was.

[33]  Court House and its activities had a sufficient connection with the proceedings for it to be appropriate that a costs order be made against it.

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(emphasis added)

Mark Martin KC, of the Queensland bar, appeared in such matter for the successful respondent seeking costs.