Introduction

The High Court recently ordered that the substantial amount of NZ$2.6 million be provided as security for costs by a litigation funder in relation to claims brought against seven defendants.(1) The fact that the litigation was being funded by a third party was a significant consideration in the determination that the plaintiff could not pay costs itself and the exercise of the court's discretion to order that security be provided. The court held that security should be relatively full, with a modest adjustment for the likely merits.

The decision shows that the courts will order that substantial security be paid by litigation funders even where:

• the claim has some real merit;
• the plaintiff would otherwise be unable to provide security; and
• security would not be ordered but for the fact that the claim (including any security) is funded by a third party with a purely financial interest in the result.

Background

This litigation arose out of the collapse of a commercial property developer, Property Ventures Ltd, and entities relating to it following the global financial crisis in 2008. The 13 plaintiff entities were all (except one) in receivership or liquidation. The receivers and liquidators brought claims against the former directors for alleged breaches of common law and statutory duties owed to the companies. They also sued PwC for alleged breaches of their duties as auditors. Discovery has been completed and the proceeding has been allocated a 12-week trial in early 2018.

Security for costs – usual approach

The defendants applied under High Court Rule 5.45 for an order for the plaintiffs to provide security for costs. Rule 5.45 relevantly provides as follows:

"(1) Sub clause (2) applies if a Judge is satisfied, on the application of a defendant…

(b) that there is reason to believe that a Plaintiff will be unable to pay the costs of the defendant if the plaintiff is unsuccessful in the plaintiff's proceeding.

(2) A Judge may, if the Judge thinks it is just in all the circumstances, order the giving of security for costs."

An order under the second sub-clause requires the plaintiff or plaintiffs against which the order is made to give security for costs as directed for a sum that the court considers sufficient by either paying that amount into court or by giving satisfactory security for that sum. The order may also stay the proceeding until the sum is paid or security provided.

The consideration of an order for security for costs in the present case involved four issues:

• Has the applicant satisfied the court that there is reason to believe that the plaintiffs will be unable to pay the defendants' costs if the claim is unsuccessful?
• How should the court exercise its discretion?
• What amount of security is appropriate and when should it be provided?
• Should the court stay the proceeding until security is provided?

The usual approach to the question of discretion to determine what is just in all the circumstances is to balance the right of the plaintiff to have access to justice for its claim and the right of the defendant to be protected against unjustified litigation. The merits of the claim are relevant, but the courts will be slow to order security where that is likely to prevent the plaintiff from being able to continue the claim, except where there is a clear impression that the claim is entirely without merit. The courts will also consider whether the defendant caused the plaintiff's impecuniosity. If so, it would be unjust for it to get the benefit of security.

Reason to believe plaintiffs unable to pay costs

In considering the first issue, the court swiftly concluded that the plaintiffs could not afford to pay costs to the defendants if they were unsuccessful. The plaintiffs were in liquidation and being funded by a third-party litigation funder.

Exercise of discretion to order security

Having concluded that the jurisdiction to order security for costs was engaged, the court then considered how the discretion should be exercised. Two factors were considered particularly relevant:

• the fact that a litigation funder was funding the claims; and
• the alleged merits of the claims.

On the first issue, the court noted that the litigation funder was a shelf company incorporated for the sole purpose of providing litigation funding for this proceeding. The court then examined the litigation funding arrangement with the plaintiffs, noting in particular:

• the percentage of any award that the funder would receive; and
• the ability of the funder to terminate the agreement at any time and thereafter not be liable for any adverse costs award (except if caused by its termination).

The court followed the approach that it would more readily award costs where a non-party which is not interested in the particular rights at stake stands to benefit from the proceeding. The court stated that the existence of a litigation funder was an important factor to influence the exercise of discretion because the plaintiffs would not be precluded from continuing the action if a significant order for security were made. Further, as the funder's interest in the proceeding was merely as a commercial venture, the court held that it should be required to contribute significantly to the defendants' costs if the claim were unsuccessful. The court also specifically noted that the funding agreement provided for security for costs to be met by the funder.

The court then considered the merits of the plaintiffs' case, emphasising the care that had to be taken in doing so at the interlocutory stage in the proceeding. The statement of claim in the proceeding was 120 pages and not summarised in the security for costs judgment, but the court considered the 'principal claims' to get an impression of their strength. Regarding the claims against PwC, the court stated that, for some claims, getting an impression of strength was impossible where the factual basis for the claims was denied by PwC. The court held that PwC had two areas of vulnerability, but that otherwise the merits of the claims against PwC were largely a neutral factor. Regarding the claims against the directors, the court again considered the merits a neutral factor, being unable to reach any meaningful conclusion on strength.

The court exercised its discretion to order security for costs on the basis that the existence of a litigation funder was a significant factor in favour of a significant order for security and the merits only warranted a minor adjustment.

Amount of security

In addressing the amount of security owed, the court acknowledged that the defendants were each entitled to separate representation, even though some issues were common to all, such as causation and remoteness. It considered costs calculated on a Category 3C basis (the highest level of scale costs available under the High Court Rules) was appropriate. An adjustment was made on the basis that senior counsel for each defendant need not attend every day of the trial, but would be necessary for eight out of the 12 weeks, and there would be savings from the plaintiffs assuming primary responsibility for the trial bundle, list of issues and authorities. On that basis and with the aim of setting security at a level that was close to the amount that would be payable in the event that a defendant succeeds at trial, the court ordered that a global sum of NZ$2.63 million (including NZ$450,000 for expert costs) be paid into court by the funder as security for costs. Only one defendant was dealt with separately with an order for NZ$150,000 in relation to its costs.

Stay of proceeding

The security was ordered to be provided in two parts: NZ$1.5 million within two months of the judgment and the remainder within an additional three months. No suggestion was made by the defendants that the proceeding should be stayed until the security was provided. No order was made staying the proceeding, but the defendants were given leave to file memoranda if the plaintiffs did not comply with the standing orders.

Comment

The High Court has reinforced that substantial security for costs, approaching full security for costs anticipated, is more likely to be ordered in cases funded by third parties. The fact that a third-party funder with a purely financial interest is involved in litigation will mean that substantial security for costs will likely be ordered when it would not be otherwise because that plaintiff would, but for the funder, be prevented from pursuing the claim. The courts clearly consider that where a party is funding litigation for commercial gain, it should be prepared to take on the financial risk involved by providing security.

For further information on this topic please contact Felicity Monteiro at Wilson Harle by telephone (+64 9 915 5700) or email ([email protected]). The Wilson Harle website can be accessed at www.wilsonharle.com.

Endnotes

(1) Walker v Forbes (NZHC 1212/2017).