Landmark decisions pave the way for cash strapped meritorious cases to proceed

Posted at Legal Practice Intelligence - 18 August 2016 - by Patrick Moloney

Sometimes clients are happy to finance their own legal costs but are seeking litigation finance in order to satisfy an order for security costs.


Patrick Moloney, Managing Director LCM Finance

Recent landmark decisions in the Melbourne Supreme court* which determined that a deed of indemnity, provided by a third party constituted satisfactory security for costs, will have far reaching implications for the litigation sector. In both cases the third party was an insurance provider.

These judgments have paved the way for the use of deeds of indemnity as a more cost effective and convenient way to satisfy a security for costs order. It also enables claims that previously stifled by an inability to comply with a security for costs order to be pursued.

As a general rule, in the Australian legal system, an unsuccessful litigant not only has to pay their own costs but also has to pay their opponent’s costs as well. Security for costs is the means by which the courts ensure that a defendant who is sued is protected on costs in the event the defence is successful. The court can order that a plaintiff provides security for the defendant’s costs and if the plaintiff is unwilling or unable, then it is prevented from pursuing its claim. 

 As a consequence of these decisions, cash or a bank guarantee is no longer the only option available to both individual plaintiffs and companies.

Both cases involved the proposal to provide security for costs in the form of a deed of indemnity from an insurer through an After the Event (“ATE”) insurance product. ATE is an insurance product that plaintiffs can obtain to provide cover should their claim be unsuccessful, a costs order is made against them and they are ordered to pay the defendant’s (potentially substantial) costs. As part of this policy the insurance provider will also issue a deed of indemnity by which it agrees to directly indemnify the defendant (or defendants) in respect of any adverse costs order that may be made against the plaintiff(s).  In light of these recent decisions a deed of indemnity can now be used to satisfy a security for costs order in lieu of cash or a bank guarantee at least in the superior courts of Victoria.

The significant advantage of a deed of indemnity from an insurer is that the plaintiff does not have to make available their own resources for security. Rather, the only cost to the plaintiff is the ATE premium and an additional, comparatively small cost (percentage of the value of the deed) for the issue of the deed of indemnity pursuant to the ATE policy. This then allows the claimant to utilise the funds that would otherwise have been deposited to pursue and conduct the litigation.

Premiums for ATE can also be flexible. They are usually calculated based on a percentage of the level of cover sought and providers often offer several alternatives: a (smaller) non-refundable premium payable up front; a part paid premium (up front) and a part contingent premium (payable only on a successful outcome); or a fully deferred premium (only payable on a successful outcome).  Notably, deferred ATE premiums only become payable on a successful outcome – another advantage to the claimant who would rather use cash resources to satisfy the security for costs order.

A further alternative available to claimants is the use of litigation finance. In that case the litigation financer bears the obligation to post security and other costs depending on the arrangement. Furthermore, as is the case with litigation finance, ATE is non-recourse to the plaintiff’s assets.

Whilst a relatively new concept here in Australia, ATE is a well-established product offshore particularly, especially in the UK. Both the DIF and APCHL decisions were provided by a well-known and long established UK ATE insurer.

ATE can also be offered as part of the wider finance arrangement by a litigation financer. ATE can also be used together with litigation finance as a way of managing the cost of the finance. In addition, the qualifying principles for both litigation finance and ATE insurance are very similar, i.e. the case is meritorious with a significantly high chance of success and that there is a good and reliable source of recovery from the defendants so that finance is a viable proposition. 

The ATE market is in its infancy in Australia with only a few litigation financers, like LCM, offering access to such a product. However, as a consequence of these judgments ATE insurance is likely to move into the forefront of the litigation playing field as a valuable tool for plaintiffs, litigation financers and also law firms looking to offer their clients products to compliment legal services.

*(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 “ACPHL” decisions).

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