Security for Costs – No Shortcuts Allowed

29th June 2017

Traditionally, an order for security for costs in a Court proceeding had to be satisfied by a cash deposit or a bank guarantee. Such orders could be burdensome and, in some cases, impossible for a claimant to meet, but the claimant’s failure to comply with the orders would cause the proceeding to be stayed and ultimately dismissed.

The provision of security for costs became a little easier for claimants last year. In the landmark decisions of the Victorian Supreme Court in DIF III Global Co-Investment Fund LP & Anor v BBLP LLC & ors [2016] VSC 401 and Australian Property Custodian Holdings Ltd (in liq) (rec and mgr appted) v Pitcher Partners [2016] VSC 399 (the “DIF” and “APCHL” decisions) the Court determined that a Deed of Indemnity provided by an After The Event (“ATE”) insurer directly to a defendant constituted satisfactory security for the defendant’s costs. In both those decisions the ATE insurer provided a Deed of Indemnity under an ATE insurance policy taken out for the plaintiff to insure it in respect to an order for adverse costs. That Deed of Indemnity constituted an irrevocable promise by the ATE insurer to pay to the defendant the amount of any costs order in its favour. (Please see our previous article Landmark decisions pave the way for cash-strapped cases to proceed).

These two judgments paved the way for the use of Deeds of Indemnity as a cost effective and convenient way to satisfy a security for costs order, and offered claimants an alternative to providing security for costs by way of cash or bank guarantee.

However, a recent decision from the Federal Court of Australia* has reinforced the need for plaintiffs to make sure that they don’t try to cut corners with the provision of security for costs. In Petersen Superannuation Fund Pty Ltd v Bank of Queensland Limited [2017] FCA 699, the plaintiff (“Petersen”) attempted to rely solely upon an ATE insurance policy as security for costs without procuring a Deed of Indemnity from the ATE insurer.

The policy in question was obtained on behalf of Petersen by the litigation funder Vannin Capital (“Vannin”) – who are financing Petersen’s suit. The insurer was AmTrust Europe (“AmTrust”). The respondents – Bank of Queensland Ltd (“BOQ”) and DDH Graham Ltd (“DDH”) – contended that the insurance policy was insufficient as security for costs. They argued that appropriate security would be a payment into the Court, bank guarantee, or an appropriately worded unconditional indemnity in their favour from Petersen’s insurer.

It should be noted that, despite the decision in DIF, Petersen and Vannin did not offer to provide an unconditional and irrevocable Deed of Indemnity from AmTrust as security.

The Court was ultimately not persuaded that the AmTrust ATE policy alone provided sufficient security for the respondents’ costs – and outlined a number of reasons for that conclusion.

Among those reasons were the following:

  • The policy was between Petersen (as the insured party) and AmTrust. The respondents were not parties to the policy – although it is the respondents who require the benefit conferred by the security.
  • The policy contained a significant number of exclusions from liability, and other conditions affecting Petersen’s legal entitlements. These conditions extended to actions that might be taken by Petersen or its advisers, which understandably BOQ and DDH have no control over and which could place the insurance contract in jeopardy.
  • BOQ and DDH have no visibility of the information that was provided to AmTrust which formed the basis for AmTrust’s acceptance of a proposal to insure. Vannin engaged with AmTrust to obtain the policy on behalf of Petersen, and Vannin provided no evidence to disclose the basis on which the policy was obtained. This meant that the respondents were not able to satisfy themselves that policy exclusions dealing with non-disclosure did not apply.
  • The policy provided that Petersen should instruct its lawyer to resist any application for the summary assessment of BOQ and DDH’s costs, unless AmTrust provides approval. This interferes with the obligations imposed on parties and their lawyers under s37N of the Federal Court Act. Whilst this is not directly related to the sufficiency of the insurance policy as a form of security, it is relevant to the exercise of the Court’s discretion on the question of whether the policy should be regarded as an appropriate form of security.

In conclusion, the following take-aways from this decision are apparent:

  • Any form of security for costs must provide direct access for the respondent(s) to the benefit of that security and cannot be conditional upon the actions of other parties, or the interpretation of a contract or policy that does not include the respondent as a party.
  • Any form of security for costs should not put parties in conflict with their obligations to follow proper process.
  • Any attempt to cut corners in the provision of security for costs that introduces ambiguity and uncertainty for respondents will be critically reviewed by the court.

ATE Insurance is relatively new to the Australian litigation landscape despite being widely used in other jurisdictions and the courts are understandably cautious when considering the implications of this new product. What these decisions demonstrate is that in circumstances where a defendant is entitled to security for costs, the form of that security for costs must be adequate to protect that interest. A Deed of Indemnity issued by an ATE insurer directly in favour of a defendant will protect that interest, whereas the provision of an ATE policy taken out for the benefit of the plaintiff, will not.

* The full judgment can be seen here



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