The Costs of Doing Business – When Will a Litigation Funder Be Held Liable For a Non-Party Costs Order?

Madeleine Harland and Tim Bost

In a recent decision of the Supreme Court of New South Wales, Jin Lian Group Pty Ltd (in liq) v ACapital Finance Pty Ltd (No 2) [2021] NSWSC 1202, Stevenson J considered whether a successful defendant was entitled to a costs order against a litigation funder where the proceedings would have been dismissed but for the funder’s involvement.

Background

The liquidators of Jin Lian Group Pty Ltd (in liquidation) (Jin Lian) – a property development company based in Sydney – brought proceedings against ACapital Finance Pty Ltd (ACapital) and Australia Capital Investment Management Pty Ltd (ACIM). Jin Lian’s liquidators alleged that ACapital had improperly retained proceeds from the realisation of a residential apartment complex. Orders were made that Jin Lian pay security for ACapital’s costs. Jin Lian did not comply with those orders and ACapital applied to have the proceedings dismissed.

In the meantime, the liquidators approached a number of litigation funders. Ultimately, Premier Litigation Funding Pty Ltd (the Funder) was engaged to provide funding. The funding was, in substance, limited to the provision of Jin Lian’s security for costs, payment of which enabled the proceedings to continue to trial. Following a trial of the dispute, Jin Lian’s claims were dismissed.[1]

Thereafter, ACapital sought (inter alia) a non-party costs order against the Funder.

The costs decision

Stevenson J commenced his analysis by observing that the Court had power to make a non-party costs order and that a number of discretionary factors in support of such an order were present here, namely that the non-party (at [23]-[24]):

  • had provided the funds for the litigation;
  • had a direct interest in, and entitlement to, a substantial part of the fruits of the litigation;
  • was involved in the litigation purely for commercial gain;
  • had a right to information and involvement in decision making in relation to the litigation; and
  • had agreed to provide an indemnity to the unsuccessful party for an adverse costs order.

Moreover, notwithstanding that the Funder’s role in the litigation was in substance limited to the provision of security for costs (and it did not instigate the proceedings, nor fund the dispute from the outset), it was clear that the provision of the funding was a “vital development” and the “decisive factor” in the continuation of the proceedings, which otherwise would have been dismissed (at [25], [51]-[52]).

Under those circumstances, Stevenson J could not “see any justification for the submission that the Funder should bear no costs of the proceedings” (at [66]). The Funder had agreed to involve itself in the proceedings purely for financial gain. Further, it was open to the Funder to negotiate with the liquidators that, were the proceedings to fail, the liquidators would share in any potential liability for costs (at [67]). His Honour continued (at [68]):

Litigation funders should be aware that if they involve themselves in pending court proceedings in circumstances where their intervention is the factor that causes those proceedings to continue and go to trial, they risk an adverse costs order. Here the Funder took a gamble. It knew its involvement was to pay security for costs. It must have appreciated that it was likely, if not certain, that but for such payment the proceedings would not continue.

Given that the proceedings had failed, Stevenson J saw no reason why the Funder should not be jointly and severally liable for ACapital’s costs, including costs which Stevenson J had assessed to be paid to ACapital on an indemnity basis (this was particularly so when a director of the Funder was aware of an offer made by ACapital and agreed it should be rejected) (at [68]-[69]).

Observations

Jin Lian is consistent with other recent decisions which have awarded non-party costs orders against litigation funders.[2]

By his Honour’s decision, Stevenson J has given clear guidance to litigation funders that the possibility of a non-party costs order is part of the risk which a funder must be assumed to have undertaken in return for its potential financial return. This risk is heightened where the provision of funding is seen to be a decisive factor in the pursuit or continuation of the proceedings.

[1] [2021] NSWSC 931.

[2] See e.g. Mistrina Pty Ltd v Australian Consulting Engineers Pty Ltd [2020] NSWSC 633.

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