Lee J endorses "self-funded" class actions in security for costs judgment
Updated: Nov 22, 2019
In Abbott v Zoetis Australia Pty Ltd (No 2)  FCA 462, a decision handed down last week by Lee J regarding an application for security for costs in a mass-tort class action being conducted on a "no win no fee" basis, his Honour gave an important endorsement to class actions being "self-funded"—that is, funded by the group members.
Abbott relates to a vaccine used in horses to treat the Hendra virus. The applicant and group members are owners of horses which are alleged to have suffered side effects as a result of the vaccine, which was distributed by the respondent, causing the horses to diminish in value.
The respondent applied for security for its costs of the proceeding. It proposed a similar procedure to the one employed in the Willmott Forests class actions, where group members were first asked their willingness and ability to provide security for costs, and then were required either to provide security for costs or to be excluded from the proceedings (unless they could establish that they were unable to provide security).
The procedure adopted in the Willmott Forests cases was the result of the Full Court decision in Madgwick v Kelly  FCAFC 61; 212 FCR 1. In the Levitt Robinson submission to the ALRC enquiry on class actions and litigation funding (of which I was the co-author) at [5.21]-[5.34] we went through the rationale of that decision and its consequences for "self-funded" class actions.
In short, the Willmott Forests claims were being funded by contributions from group members. The Full Court determined that because it was essentially commercial litigation and the group members as a whole were capable of providing security for costs and were effectively third parties standing behind the proceedings, their ability to provide security should be ascertained and, if it was found that they could provide it, they should be required to do so.
The result of this decision was that the applicants' lawyers had to go through the costly exercise of approaching group members and ascertaining their ability and willingness to provide security for costs, then obtaining security from those who were willing. There were also a number of interlocutory applications involved. Eventually an amount of $1,730,379 was proffered as security for the respondents' costs. A while later the proceedings were settled on relatively unfavourable terms for the applicants, in circumstances where Murphy J commented that “there were substantial difficulties in funding the proceedings which resulted in significant gaps in the preparation of the cases.” One can only imagine what would have happened had the applicants' solicitors had an additional $1.7 million to work with and had they not had to expend significant time and resources on the security for costs issue, and instead been able to get on with the preparation of the applicants' case.
In Abbott, while making no indication that the Full Court decision in Kelly may have been incorrect, Lee J found that the Full Court's decision was confined to the circumstances of the case, and the approach taken there was not appropriate in the case before him. At - his Honour set out the reasons why he had determined that an order for security for costs was not appropriate, picking up on many of the same policy considerations as those set out in the Levitt Robinson ALRC submission.
Perhaps the most important part of his Honour's reasons was set out at -:
"Sixthly, although I do not consider that the applicant has discharged its burden of proving, in accordance with s 140(1) of the Evidence Act 1995 (Cth) stultification will necessarily occur (as that concept has been understood in the authorities), it would be a mistake, in the context of a class action such as the present, to consider that this is determinative. I accept ... that: "... a court is not justified in declining to order security on the ground that to do so will frustrate the litigation unless a company in the position of the appellant here establishes that those who stand behind it and who will benefit from the litigation if it is successful ... are also without means. [...]"
But if one was to apply this principle indiscriminately to Part IVA proceedings, then strictly speaking, the only true way of proving stultification with certitude in an open class proceeding would be to prove that no group member had assets sufficient to proffer security or that no group member, with such assets, would pledge them. Whatever be the case in the different context of unfunded closed classes or unfunded commercial class actions, to place that burden on an applicant in an unfunded mass tort or product liability open class action such as the present, would necessarily require a costly and time consuming interrogation of the financial position of a very large number of group members – most of whom, no doubt, have no other connexion with the applicant other than the happenstance of being named as group members (and hence being someone who may benefit from a positive determination in relation to the common questions). To contend that current authority developed in the context of ordinary, inter partes litigation requires such an approach, ignores, or at least diminishes: the breadth of the discretion exercised in security applications; the unusual nature of open class Part IVA proceedings; and the concern of the Court expressed in Madgwick (at 19 ) that the Court’s approach in that case should not be taken as advocating that litigation funding should be put in place to avoid an order for security.
Seventhly, and connected to the last point, there is the broader desirable policy outcome of not putting in place obstacles to the ability of applicants to run Part IVA proceedings in a cost effective way by “self-funding”. This is not to downplay the relevance of possible injustice to respondent, but reflects the reality that providing protection against adverse costs and the provision of security has driven the funding market for litigation. Safeguarding against adverse costs and the provision of security can be addressed by litigation funding in a form that has now become common; it could also be addressed by solicitors for class action applicants as part of the basis upon which they would be allowed to charge contingency fees (as recently recommended, as Recommendations 17 and 18, by the Australian Law Reform Commission in its report, Integrity, Fairness and Efficiency—An Inquiry into Class Action Proceedings and Third-Party Litigation Funders (ALRC Report 134) at 205). Experience points to the fact that both forms of “funding” may be accompanied by “After-the-Event” (ATE) insurance, but irrespective of such insurance, the derivation of the benefit from funding litigation in this way, will be accompanied by the concomitant burden of providing protection against adverse costs and provision of security. What is evident is that each of these models involves substantial costs visited, in whole or part, on group members, directly or indirectly, and involves third parties making a profit by the use of public processes of the Court. There is no a priori difficulty with these models properly employed, but the unthinking application of principles developed in a different type of litigation which have the effect of requiring group members to, in effect, put up security, could inadvertently serve to undermine the ability of self-funding of open class actions to develop as an option. The Full Court (Jacobson, Middleton and Gordon JJ) in Australian Securities and Investments Commission v Richards  FCAFC 89 at  has explicitly recognised that self-funding of class actions should be perceived as “an important alternative to commercial litigation funders and should, to the extent possible, be encouraged”."
Hopefully this decision will go a long way towards encouraging self-funding of class actions in future, rather than plaintiff lawyers feeling the need to go down the litigation funding path.
As a final note, I thank Professor Vince Morabito of Monash University for drawing Lee J's decision to my attention.
An application for leave to appeal from Lee J's decision was dismissed by the Full Federal Court: Zoetis Australia Pty Ltd v Abbott  FCAFC 153.