Introduction

The Federal Court of Australia recently heard argument about whether an insurance policy offering protection against an adverse costs liability could be proffered as sufficient security for costs.

This week, the Court handed down its decision rejecting the sufficiency of the particular policy and requiring the plaintiff to provide bank guarantees (or such other security as the parties might agree upon) failing which the proceedings would be stayed.

This decision may significantly undermine the benefits of this type of policy in Australia.

Background

The proceedings are representative proceedings brought pursuant to the provisions of the Federal Court of Australia Act. 

The Plaintiff, Petersen Superannuation Fund Pty Limited, alleges that the Defendants, the Bank of Queensland Limited and DDH Graham Limited, are liable for losses suffered as a result of various fraudulent transactions on market money deposit accounts held by the Plaintiff and those whom the Plaintiff represents. 

The Plaintiff holds an adverse costs insurance policy underwritten by AmTrust Europe ("Policy"). Pursuant to its terms the Plaintiff is entitled to indemnity for defence costs up to $5.5million.

Litigation funder, Vannin Capital Operations Limited, is funding the Plaintiff's claim.

The Defendants sought security for the costs which they anticipated they would incur in the preliminary stages of this matter. The Plaintiff and Vannin accepted that it was appropriate that the Defendants' costs be secured but were prepared to proffer nothing more than the Policy to secure those costs.

The Issues

Introduction

Section 1335(1) of the Corporations Act provides that:

“Where a corporation is a plaintiff in any action or other legal proceeding, the court having jurisdiction in the matter may, if it appears by credible testimony that there is reason to believe that the corporation will be unable to pay the costs of the defendant if successful in his, her or its defence, require sufficient security to be given for those costs and stay all proceedings until security is given.”

The Court was satisfied that the threshold requirement of credible testimony was satisfied. 

Could the Policy, as a matter of principal, be advanced as security for costs and, if so, did its terms proffer sufficient security ?

Matter of Principal

Upon reviewing a number of recent UK decisions, the Court noted that a practice had emerged in the UK of accepting appropriately worded adverse costs policies as sufficient security for a defendant's costs.

The Court therefore accepted that “an appropriate (Policy) should be regarded as an acceptable form of security for cases such as this”. 

Suitable Terms

But the Court was not satisfied that the Policy's terms proffered sufficient security. Its reasons included the following:-

1. The Defendants are not insured under the Policy even though it is the Defendants who will have the benefit of the costs order and it is the Defendants who will be seeking the benefit of the security which the Policy affords.
2. The Defendants have no contractual rights upon which they can rely to force the Plaintiff to enforce the terms of the Policy.
3. There are various provisions in the Policy which entitle the insurer to escape any liability to the Plaintiff in the circumstances which those provisions prescribe.
4. It is not clear what would happen to the proceeds of the Policy in the event that the Plaintiff went into liquidation.
5. The Policy instructs the Plaintiff to take various steps to resist any summary assessment of the Defendants' costs for which the Plaintiff is liable.

Claiming Directly against the Insurer

The Court noted that even though the Defendants might be entitled under the new Civil Liability (Third Party Claims Against Insurers) Act 2017 (NSW) to seek recovery directly against the Plaintiff's insurers, there remained a number of difficulties which might prevent the Defendants from effectively or conveniently prosecuting that claim.

Conclusion

The Court directed the Plaintiff to provide security in the form of bank guarantees (or such other form as they might agree upon) for approximately $1.5 million.

The Policy was rejected as security because its terms and conditions rendered it unsuitable. The troubling point for insurers about this case is that its observations about the Policy could be extended to all adverse costs policies rendering many if not all of them unsuitable security. 

Unless this decision is overturned on appeal, there may need to be a complete rethink about adverse costs policies in Australia.

The name of the case is Petersen Superannuation Pty Limited v Bank of Queensland Limited & Anor [2017] FCA 699. If you would like a copy, please let me know.