On 26 May 2020, the Supreme Court of New South Wales handed down its decision on costs in Mistrina Pty Ltd v Australian Consulting Engineers Pty Ltd – Costs  NSWSC 633.
A key issue for consideration was whether a third party costs order ought to be made against the litigation funder.
- The first plaintiff was in liquidation and the second plaintiff was a deceased estate, the only asset of which was its interest in the claim the subject of the proceedings. The plaintiffs lost and the proceedings were dismissed.
- The plaintiffs were funded by Pretium Funding Pty Limited (Pretium). Under the funding agreement, Pretium was to receive out of the proceeds of any judgment or settlement, first, all of its outlay and then, after the plaintiffs’ lawyers had been paid, 45% of the remainder.
- The plaintiffs had paid $81,750 as security for the defendant’s costs (Security).
- On 25 October 2018, the defendant made an Offer of Compromise that there be judgment in favour of the defendant, each party to bear their own costs of the proceedings. The Offer was open for 28 days. Simultaneously, the defendant made a Calderbank offer that there be a discontinuance and release. By then, the defendant had incurred costs of the order of $21,000.
- The funding agreement with Pretium came after these offers, on 15 March 2019.
- The plaintiffs pay the defendant’s costs on the ordinary basis until 11am on 26 October 2018 (the date being the day after the offers) and on an indemnity basis thereafter;
- Pretium should be liable jointly and severally with the plaintiffs to pay the defendant’s costs incurred from 15 March 2019 (the date of the funding agreement); and
- the application for payment out of the Security into the trust account of the defendant’s solicitors was refused.
Third party costs
His Honour helpfully summarises the applicable principles at  – . His Honour considered that it was just to make a costs order against Pretium for the following reasons:
- Pretium’s facilitation of the impecunious plaintiffs’ access to justice was more to serve its own commercial and financial ends than to facilitate access to justice by them.
- Without Pretium’s involvement, bringing the proceedings would have been beyond the plaintiffs’ means. For providing those means, Pretium obtained the prospect of a significant financial return in the form of a proportion of any verdict or settlement (after the payment of its own costs and that of the lawyers fighting the case).
- The possibility of a non-party costs order is part of the risk which Pretium must be assumed to have undertaken in return for its potential financial return. It is inevitable that a commercial litigation funder would see this as a factor in the mix of its assessment to participate and on what terms.
Pretium’s argument against making the order was that:
- it had no control over the litigation and did not have a majority interest in its fruits;
- the defendant could have applied for further security for costs; and
- the defendant did not until December 2019 foreshadow an application for a non-party costs order against it.
His Honour rejected these arguments at  finding that:
- Pretium was not an idle or disinterested bystander. It participated in settlement discussions and claimed legal professional privilege over documents subpoenaed by the defendant in an endeavour to obtain information about its further participation. If the litigation had yielded an amount less than or equivalent to Pretium’s costs, it would have got it all.
- Given that Pretium funded the litigation, it may be inferred that Pretium would have put up the money.
- There is nothing to suggest that if it would expressly have been put on notice that the defendant might ask for a non-party costs order, Pretium would have been deflected from its course.
His Honour concluded that:
Justice dictates that the successful defendant against the impecunious plaintiffs funded by the commercial funder should not be left with an empty costs order against persons of straw.
- Choose your funder wisely as you may both be on the hook to pay your opponent’s costs.
- Structure your funding agreement carefully to ensure adequate protection.
- There is an expectation that adverse costs is a risk reflected in a funder’s pricing.
- Whilst non-party costs orders are ‘exceptional’, the Court has a broad discretion to make such an order and will have regard to what is just in the circumstances.
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This article was authored by Siba Diqer, who is an investment manager in LCM’s Melbourne office.