APFC No.1 Corporation v Insurance Australia Limited

[2024] NSWSC 534

Supreme Court

New South Wales

Medium Neutral Citation:

APFC No.1 Corporation v Insurance Australia Limited [2024] NSWSC 534

Hearing dates:

12 April 2024

Date of orders:

8 May 2024

Decision date:

08 May 2024

Jurisdiction:

Equity - Commercial List

Before:

Nixon J

Decision:

See [131]

Catchwords:

COSTS – security for costs – where foreign plaintiffs with no assets have entered an agreement with a litigation funder – where dispute as to form and quantum of security – where plaintiffs proposed that adequate security was provided by an after-the-event insurance policy underwritten by a related entity of the funder – where second defendant sought security in form of cash deposit or bank guarantee – whether after-the-event insurance policy is adequate to achieve the objective of security for costs – whether security should be ordered in quantum sought by second defendant

Legislation Cited:

Contracts (Rights of Third Parties) Act 1999 (UK), s 1

Corporations Act 2001 (Cth), s 1335

Insurance Contracts Act 1984 (Cth), s 48

Uniform Civil Procedure Rules (NSW) r 42.21

Cases Cited:

Adeva Home Solutions Pty Ltd v Queensland Motorways Management Pty Ltd (2021) 9 QR 141; [2021] QCA 198

AFC Holdings Pty Ltd v Shiprock Holdings Pty Ltd [2010] NSWSC 985

Allstate Life Insurance Co v Australia & New Zealand Banking Group Ltd (No 19) (1995) 134 ALR 187; [1995] FCA 1778

Blue Oil Energy Pty Ltd v Tan [2014] NSWCA 81

Brundza v Robbie & Co (No 2) (1952) 88 CLR 171; [1952] HCA 49

Bryan Fencott & Associates Pty Ltd v Eretta Pty Ltd (1987) 16 FCR 497; [1987] FCA 102

Colt Industries Inc v Sarlie(No 2) [1966] 1 WLR 1287

Denso Manufacturing UK Ltd v Great Lakes Reinsurance (UK) plc [2017] Lloyds Rep IR 240

DIF III Global Co-Investment Fund LP v BBLP LLC [2016] VSC 401

Energy Drilling Inc v Petroz NL [1989] FCA 146

Fiduciary Ltd v Morningstar Research Pty Ltd [2004] NSWSC 664

Idoport Pty Ltd v NAB Ltd [2001] NSWSC 744

In the matter of Tiaro Coal Ltd (in liq) [2018] NSWSC 746

Kuligowski v Metrobus (2004) 220 CLR 363; [2004] HCA 34

Lake v Simmons [1927] AC 487

MA Productions Pty Ltd v Austarama Television Pty Ltd (1982) 7 ACLR 97

Malamit Pty Ltd v WFI Insurance Ltd [2017] NSWCA 162

MHG Plastic Industries Pty Ltd v Quality Assurance Services Pty Ltd [2002] FCA 821

Morris v Hanley [2001] NSWCA 374

Petersen Superannuation Fund Pty Ltd v Bank of Queensland Ltd [2017] FCA 699

Plaza Print Pty Ltd v South British Insurance Co Ltd (1984) 68 FLR 340

Saxon Woods Investments Ltd v Costa and others [2023] EWHC 850 (Ch)

Sunday Times Newspaper Company Ltd v Mcintosh (1933) 33 SR (NSW) 371

Vertical Australia Pty Ltd v Air Company Vertical T-LLC [2012] NSWSC 719

Wollongong City Council v FPM Constructions Pty Ltd [2004] NSWSC 523

Wollongong Coal Pty Ltd v Gujarat NRE Properties Pty Ltd [2019] NSWSC 187

XL Insurance Co SE v BNY Trust Company of Australia Ltd [2019] NSWCA 215

Category:

Procedural rulings

Parties:

APFC No.1 Corporation (First Plaintiff)
APFC No.2 Corporation (Second Plaintiff)
SLFC No.1 Corporation (Third Plaintiff)
LFC No.1 Corporation (Fourth Plaintiff)
LFC No.2 Corporation (Fifth Plaintiff)
LFC No.3 Corporation (Sixth Plaintiff)
THC No.2 Corporation (Seventh Plaintiff)
Tokio Marine & Nichido Fire Insurance Co Ltd (Second Defendant)

Representation:

Counsel:
M Jones SC with A Smith (Plaintiffs)
E Collins SC with P Holmes (Second Defendant)

Solicitors:
Thomson Geer (Plaintiffs)
Kennedys (Australasia) Partnership (Second Defendant)

File Number(s):

2023/111959

Publication restriction:

Nil

JUDGMENT

1. By an Amended Notice of Motion filed on 11 April 2024, the Second Defendant, Tokio Marine & Nichido Fire Insurance Co Ltd (Tokio Marine), seeks an order that the Plaintiffs provide security for its costs in respect of what is described as the “Expanded First Phase” of the proceedings, pursuant to rule 42.21(1)(a) of the Uniform Civil Procedure Rules 2005 (NSW) (UCPR) or section 1335 of the Corporations Act 2001 (Cth).

2. There are two main issues for resolution.

3. First, there is a dispute as to the proposed form of security. Tokio Marine seeks security by way of money paid into court, or by way of an unconditional guarantee from an Australian bank or other authorised deposit-taking institution. The Plaintiffs submit that an after-the-event insurance policy (ATE Policy) which they have obtained and which is underwritten by Burford Worldwide Insurance Ltd (BWIL) provides adequate security for Tokio Marine’s costs.

4. Secondly, there is a dispute as to the quantum of the security. Tokio Marine seeks security in the amount of $1,394,940 in respect of its costs of the Expanded First Phase, that is, its costs up to and including its review of the Plaintiffs’ lay evidence. The Plaintiffs have raised various issues about the underlying estimate of costs for this phase of the proceedings, and the extent of the discount which should be applied to that estimate when calculating the amount likely to be recovered on a party/party basis.

5. The issue of quantum arises only if I find that the ATE Policy does not provide adequate security and that security should instead be ordered in the form sought by Tokio Marine. If the ATE Policy does provide adequate security, there is no need to consider quantum because it is common ground that the limit of cover under the ATE policy (which was redacted for this application) is in excess of the amount sought by Tokio Marine as security for its costs of the Expanded First Phase.

Factual Background

6. Each of the Plaintiffs is a company incorporated in the Republic of the Marshall Islands.

7. The Plaintiffs are special purpose vehicles which were established by Cornerpiece Capital Partners Pte Ltd (Cornerpiece) in order to finance the commodity trading which is the subject of these proceedings. Cornerpiece is an investment and asset management firm based in Singapore.

8. Each of the Plaintiffs was in the business of financing receivables owed to certain commodity sellers. The structure of this financing was described by the Chief Executive Officer of Cornerpiece, Jungsun Choi, as taking the following form:

1. the relevant Plaintiff entered into a Receivables Purchase Agreement with a commodity seller, by which the Plaintiff agreed to purchase certain accounts receivable, which were then assigned to the Plaintiff by the commodity seller with the consent of the commodity buyers;

2. the obligations of the commodity buyers to pay for the commodities were insured in favour of the commodity sellers by either Tokio Marine or Insurance Australia Limited (IAL) under multi-buyer trade credit policies; and

3. pursuant to documents entitled “Proceeds Assignment” and endorsed by BCC Trade Credit Pty Ltd as agent for Tokio Marine or IAL (as the case may be), the insured commodity sellers assigned their rights, title and interest in the insurance proceeds to the relevant Plaintiff.

9. Each of the Plaintiffs maintained a collection account, the purpose of which was to collect receivables paid by a commodities buyer. During 2019 and 2020, various commodities buyers failed to pay the receivables which had been purchased by the Plaintiffs under the Receivables Purchase Agreements. Mr Choi deposed that the Plaintiffs are reliant on such payments being made and have no other income stream. He further deposed that, as a result of the commodities buyers’ failure to pay the receivables which were purchased by the Plaintiffs, each of the Plaintiffs has “cash balances of zero or close to zero”.

10. Between August 2020 and September 2020, the Plaintiffs submitted claims under various trade credit insurance policies which were said to have been the subject of “Proceeds Assignments”.

11. Tokio Marine and IAL have not paid those claims.

12. In late 2021, Cornerpiece approached litigation funders to fund proceedings against Tokio Marine and IAL in order to prosecute the Plaintiffs’ claims under the trade credit insurance policies.

13. Cornerpiece selected Burford Capital Limited (Burford) as the funder. The funding agreement has not been produced to Tokio Marine and was not in evidence on this application. However, Mr Choi deposed that a commission is payable to Burford under the terms of that agreement.

14. Cornerpiece obtained the proposal for the ATE Policy from BWIL, which is a related body corporate of Burford. BWIL is a company incorporated and registered in Guernsey. There is no evidence to suggest that BWIL has any presence or assets in Australia.

15. The proceedings were commenced on 6 April 2023. The Plaintiffs have brought claims in respect of seven trade insurance policies which were issued in the period between June 2019 and February 2020. Four of those policies were issued by the First Defendant, IAL, and the remaining three by the Second Defendant, Tokio Marine. Those policies were issued to various companies including the Third to Seventh Defendants, and indemnified the Insureds up to a defined Insured Percentage in the event that an “Insured Buyer” failed to pay for the commodities supplied.

16. The Commercial List Statement annexes a number of “Material Facts Schedules” which refer to multiple alleged transactions between insured commodity sellers and Insured Buyers involving the sale of various commodities, in respect of which payment has not been made. These transactions generally involve international sales of commodities, without any connection to this jurisdiction, between entities which are not parties to the proceedings, and some of which are now in liquidation. For example, one such transaction involved Sealoud Asia Pte Ltd (in liq), which is a joint insured with the Fifth Defendant under a policy issued by Tokio Marine, entering into a contract with Quantum Cube Resources Sdn Bhd, which is identified as an Insured Buyer under that policy. Pursuant to this contract, Sealoud Asia was to sell 4,535 metric tonnes of Argentine Wheat Packing in Bulk to Quantum Cube Resources for around EUR 1.13m, with the port of loading to be Bahia Blanca in Argentina, and delivery to be made to Cigading or Ciwandan in Indonesia. Quantum Cube Resources is alleged to have failed to make this payment, which is said to be an insured debt under the policy issued by Tokio Marine.

17. The Plaintiffs claim that the policies and the Proceeds Assignments require IAL or Tokio Marine (as the case may be) to pay the relevant Insured Percentages in respect of each of these transactions to the Plaintiffs.

18. The total amount sought by the Plaintiffs against Tokio Marine is more than EUR 36.71m.

19. In written submissions, the Plaintiffs had contended that the ATE Policy was “the only realistic form of security” which they were able to provide and that, if security were ordered in the form of payment of cash into court or a bank guarantee, “this litigation will be stultified”. However, at the hearing of the application, Senior Counsel for the Plaintiffs conceded that, in circumstances where he was unable to speak as to the position of the funder, Burford, he did not press the submission as to stultification.

Form of Security

Relevant Principles

20. In Blue Oil Energy Pty Ltd v Tan [2014] NSWCA 81 at [22], Beazley P and Tobias AJA observed that there is no general rule to the effect that security can only be ordered in the manner which is the least disadvantageous to the plaintiff, and that the “true issue” is whether a particular form of security is “adequate to protect the party seeking it”. Their Honours noted (at [23]) that there is nothing in r 42.21(2) of the UCPR or s 1335(1) of the Corporations Act that contains any limitation as to the form of security which may be ordered.

21. In DIF III Global Co-Investment Fund LP v BBLP LLC [2016] VSC 401 at [38], Hargrave J said that the “central inquiry” which arises where security is put forward in a form other than payment into Court or by way of a bank guarantee from an Australian bank is:

“whether the proposed form of security is adequate to achieve its object as security; namely, to provide a fund or asset against which a successful defendant can readily enforce an order for costs against the plaintiff.”

22. In assessing whether the proposed security meets the object of providing a fund or asset against which a successful defendant can readily enforce an order for costs against the plaintiff, it is necessary to consider the costs, time and steps involved in taking such enforcement action, as well as any attendant risks in doing so.

23. A plaintiff proposing a form of security bears a “practical onus” of satisfying the Court that the proposed security will not impose an “unacceptable disadvantage” on the defendant: DIF III Global at [39]. The “fact that some delay may be involved in accessing that security is, while relevant, not decisive”: ibid at [38]. Having to enforce a judgment overseas does not put the defendant at an unreasonable disadvantage if the party against whom the judgment is to be enforced has sufficient assets in the overseas jurisdiction and judgment can be enforced there: In the matter ofTiaro CoalLtd (in liq) [2018] NSWSC 764 at [13] per Gleeson JA, and the cases there cited.

24. In exercising its broad discretion as to the form of security for costs, the Court will usually apply the approach summarised by Hargrave J in DIF III Global: Tiaro Coal at [10] per Gleeson JA. Importantly, the question for the Court is not one of “relative adequacy”, but rather whether the security put forward is adequate to achieve the object of providing a fund or asset against which a successful defendant can readily enforce an order for costs: Tiaro Coal at [12].

25. It follows that it would be an error to approach the issue of the form of security by undertaking a comparison exercise of the relative attributes of the security offered by the plaintiff and the “conventional” or “familiar” forms of security by cash deposit or bank guarantee, with a view to determining which was superior: Tiaro Coal at [22] per Gleeson JA, referring to DIF III Global at [65]. In the cited passage, Hargrave J observed that a comparison approach “will invariably lead to payment into court on each occasion security is ordered, because that is by far the superior form of security”.

26. In the present case, the proposed security is not in the form of “a fund available within the jurisdiction of this Court against which [a successful defendant] can enforce the judgment for costs” (Energy Drilling Inc v Petroz NL [1989] FCA 146 at [24] per Gummow J), but rather in the form of an asset which is said to be adequate to achieve the same object, namely, a chose in action against an insurer.

27. I accept that, in an appropriate case, such a chose in action may be adequate to achieve the object of an order for security of costs. It does, however, depend upon the terms of the chose in action and the extent to which there are risks attaching to its enforcement.

28. In DIF III Global, Hargrave J found that adequate security was provided where an insurer, AmTrust Europe Ltd (AmTrust), which had substantial assets in the United Kingdom, proposed to give a deed of indemnity directly to the defendants. This was to be accompanied by the payment into court of a sum of $20,000 for each group of defendants, to cover the costs of registering a foreign judgment in the United Kingdom, and by an undertaking that the deed would include a term to the effect that AmTrust would not seek security for costs in any enforcement proceedings against it in the United Kingdom. The clauses of the proposed deed of indemnity included that (at [10]):

1. AmTrust “unconditionally and irrevocably undertakes to pay” the defendants any sum or sums which the plaintiffs are liable to pay in respect of the defendants’ costs up to a specified limit (being the full amount of the security ordered by the court);

2. a certified copy of a court order against the plaintiffs for payment of the defendants’ costs, or a signed agreement, shall be “conclusive evidence of the liability of and binding upon AmTrust without further enquiry by AmTrust”;

3. AmTrust’s liability under the deed “shall not be subject to avoidance on the grounds of fraud or misrepresentation” by the plaintiffs; and

4. the deed is governed by the laws of Victoria and is subject to the exclusive jurisdiction of Victorian courts.

29. Hargrave J said (at [72(5)]) that, given the terms of the proposed deed, “it is hard to think how [AmTrust] could justifiably fail to honour its obligations under the indemnity if the terms required it to do so”; and that “summary judgment would likely follow in the unlikely event that AmTrust defaulted”. There was evidence before the Court in DIF III Global that AmTrust regularly issues such direct liability deeds of indemnity in favour of defendants in respect of security for cost commitments and that AmTrust had never failed to honour such a deed. Hargrave J observed (at [76]) that:

“The proposed AmTrust deed of indemnity is akin to the form of bank guarantee. It is an unconditional promise by deed to pay the defendants the amount of any costs order, or a written agreement with the plaintiffs to pay them costs. It is ‘a promise which would in all likelihood be honoured, given by an entity with the wherewithal to pay and against whom enforcement can readily be obtained’. As such, it will, in substance, put the defendants in the same position they would be in if the plaintiffs were UK residents with sufficient assets in the UK to pay the amount of the security ordered if the defendants are successful and obtain an order for costs of that amount in the proceeding. Put another way, the proposed AmTrust indemnity will in substance place the plaintiff in the same position as a foreign plaintiff with substantial assets in a foreign jurisdiction where enforcement of an Australian judgment is a routine process.”

30. In Tiaro Coal, Gleeson JA considered a deed of indemnity from AmTrust in favour of the defendant which had terms similar to, but in some respects different from, the deed considered in DIF III Global. This deed also provided that AmTrust “unconditionally and irrevocably undertakes to pay” to the first defendant any sums which the plaintiff was legally liable to pay in respect of costs; that a sealed copy of the relevant court order was “conclusive evidence” of the plaintiff’s liability to pay costs and was binding upon AmTrust; that the deed will be governed by, and subject to the jurisdiction of, the State of New South Wales; and that AmTrust would not seek any security for costs in respect of any application by the first defendant to register any costs order in the United Kingdom (at [14]-[15]). However, there were two aspects of the proposed deed which were identified as a matter of concern.

31. First, clause 2 of the proposed deed contained the following qualification on Amtrust’s liability:

“… AmTrust will not be deemed to provide any undertaking to pay the Defendant and will not be liable to make any payment to the Defendant under this Deed (or at all) to the extent that the provision of such undertaking and or such payment would expose AmTrust to any sanction, prohibition or restriction under United Nations resolutions, and or the trade and economic sanctions, laws and or regulations of the European Union, United Kingdom, United States of America and or of Australia.”

32. Gleeson JA considered (at [26]-[27]) that this clause contained “inherent uncertainties”: namely, that there was no material before the Court concerning whether any existing resolutions, sanctions, laws or regulations of the type described might affect the giving of the deed by AmTrust or the payment of the indemnity to an Australian defendant in Australian proceedings; and that the clause was not limited to existing resolutions etc, but extended to any future action by the United Nations, European Union, United States or United Kingdom which would preclude the giving of the deed or the payment of the indemnity, and it was impossible to predict what such future action might be. His Honour said (at [28]):

“Given the plaintiff bears a ‘practical onus’ of establishing that the proposed security is adequate, I am not persuaded that the deed in its present form containing the qualification in cl 2 provides sufficient security for Mr Meers’ costs of this proceeding.”

33. Secondly, cl 7(b) of the deed referred to the provision of a “relevant final costs certificate”, which was not defined. The meaning of this phrase was ambiguous, given that a certificate issued by a costs assessor under the regime applying in New South Wales may be the subject of an application for review, in which case the operation of the certificate is suspended, and a dissatisfied party may appeal to the Court on matters of law or with leave in respect of matters of fact (at [30]).

34. Gleeson JA held that security should be provided either by way of a payment into Court, or by way of a deed of indemnity in the proposed form, but with the following amendments: the relevant part of cl 2 should be deleted; and cl 7(b) should be deleted or amended (as the parties may agree) to address the ambiguity arising from the reference to a “final” costs certificate (at [37]). That is, his Honour was of the view that the deed of indemnity which had been proffered by the plaintiff would not provide adequate security unless those provisions of the deed which gave rise to uncertainty as to its operation were either deleted or amended so as to remove such uncertainty.

35. Whereas a deed of indemnity from an insurer in favour of a defendant was regarded as acceptable security in DIF III Global and (provided that changes were made to remove uncertainty and ambiguity) in Tiaro Coal, a similar deed was found to provide inadequate security in Adeva Home Solutions Pty Ltd v Queensland Motorways Management Pty Ltd (2021) 9 QR 141; [2021] QCA 198. In that case, Bond JA (with whom Fraser JA and Wilson J agreed) quoted and accepted (at [31]) Gleeson JA’s observations in Tiaro Coal to the effect that it would be an error to determine the adequacy of a proposed form of security by comparing its relative attributes with those of familiar forms of security, namely, a cash deposit or a bank guarantee from an Australian bank. Bond JA said (at [31]) that this does not mean that:

“… in a case such as the present, the exercise of the discretion should not proceed from an explicit recognition that the proposal under consideration is that the Court should require a departure from the ordinary course of requiring the provision of a fund within the jurisdiction, and, accordingly, an inquiry into whether there were countervailing considerations which warranted taking that course in the particular case.”

36. Bond JA held (at [68]) that the primary judge was correct to reach the view, on the evidence before him, that:

1. there was inevitably some risk of cost and delay associated with making demand against a foreign-based insurer, commencing proceedings on the deed if its demand was not met, obtaining judgment in Australia, registering that judgment in England and then possibly taking enforcement action, and this risk was uncertain of assessment in many respects (see [63], [67]);

2. the primary judge was not prepared to require the defendant to accept that risk without good reason; and

3. good reason had not been demonstrated.

37. His Honour said (at [68]) that:

“Whilst one can reasonably debate the proper assessment of the extent of the risk, it is plain that the risk of cost and delay must be regarded as greater than would apply if the order sought by the respondent below was made. Money in court carries no risk, and unconditional bank guarantees from Australian banks have a long history of being regarded by Australian courts as good as cash. For reasons identified at [22] and [23] above, a Court would not ordinarily require security which accepted the risks inherent in the appellant’s proposal unless there was some countervailing consideration establishing a good reason to do so. Upon analysis in this case, the only reason proposed by the appellant is that those standing behind the proceeding prefer that course. I would not regard that to be a sufficient reason.”

38. Tokio Marine submitted that I should follow the decision in Adeva Home Solutions unless I was persuaded that it was plainly wrong. The Plaintiffs submitted that the ratio of Adeva Home Solutions was limited to the finding that no House v The King error had been established and that, insofar as (obiter) views were expressed by Bond JA regarding the appropriate exercise of the discretion, those views should not be followed as they were inconsistent with the principles set out in DIF III Global and Tiaro Coal (and the cases there cited).

39. I do not need to determine this issue, since the form of security proffered in the present case is different from the form of security that was considered in DIF III Global, Tiaro Coal and Adeva Home Solutions. The Plaintiffs have not proffered a deed of indemnity from an Insurer, issued directly to Tokio Marine, by which the insurer unconditionally agrees to pay the amount of any costs order made in Tokio Marine’s favour. Instead, the Plaintiffs are proffering an ATE Policy issued by BWIL to the Plaintiffs and Cornerpiece, which provides cover for “Adverse Costs” (as defined) on the terms stated in that policy, and contend that adequate security is provided by Tokio Marine’s rights to enforce that policy against BWIL as a third party beneficiary.

40. I was referred to two decisions which have considered whether adequate security for a defendant’s costs is provided by the terms of an ATE Policy which the plaintiff has obtained in respect of its exposure for adverse costs.

41. The first is the decision of Yates J in Petersen Superannuation Fund Pty Ltd v Bank of Queensland Ltd [2017] FCA 699. His Honour accepted (at [92]) that “although courts are accustomed to ordering security in the form of payment into court or by provision of a bank guarantee, on present authority it would be wrong to see those forms as the only ones that could satisfy the requirement for sufficient security”. His Honour was “persuaded that, depending on the circumstances of the given case, an appropriately worded ATE policy might be capable of providing sufficient security for an opponent’s costs” (at [92]).

42. Yates J held (at [96]) that the notion of “sufficiency” in this context “requires more than a consideration of the policy terms and conditions, their contractual effect and how readily they might be or are likely to be legitimately avoided”, stating:

“These are no doubt important considerations. They must, of course, comprehend that parties to a contract of insurance, although acting in good faith, will nonetheless act in their own interests and may well disagree, on legitimately contestable grounds, on whether events have occurred that would enable the insurer to avoid or limit its liability under the contract in question. But the consideration of ‘sufficiency’ must go further and extend to a practical assessment of the risks involved in having the benefits of the insurance, when called upon, turned to the account of those for whom security is to be provided.”

43. At the same time, his Honour observed (at [82]) that the United Kingdom cases have cautioned against a concern “over what might be seen, on the evidence, as no more than ‘theoretical’ possibilities” that the terms of the policy will be breached, commenting that: “even with an apparently solvent claimant company that is currently trading profitably, there is always a theoretical possibility that things can change unexpectedly and, perhaps, quite rapidly”.

44. Yates J noted (at [120]) that there were various terms and conditions of the AmTrust ATE policy which were protective of AmTrust’s position, and accepted that AmTrust would “likely to be subject to greater risk under an unconditional indemnity in favour of [the respondents] than it is under the AmTrust policy in favour of [the applicant]”. His Honour added:

“Correspondingly, I would accept that security in relation to [the applicant’s] potential liability for [the respondents’] costs, in the form of [the applicant’s] contractual entitlements under the AmTrust policy, presents greater risk for [the respondents] than would an unconditional indemnity from AmTrust Europe which is irrevocable and which [the respondents] could enforce in their own right.”

45. That is, his Honour was of the view that a deed of indemnity of the type offered in DIF III Global provided significantly less risk for the defendants than the ATE Policy in Petersen.

46. Having regard to those matters, Yates J ordered that the applicant provide security by payment into court or by providing an appropriately worded bank guarantee from an Australian trading bank. His Honour noted that it may be that the parties can agree on some other form of security, such as an unconditional and irrevocable deed of indemnity in favour of the respondents of the type proposed in DIF III Global (which the applicant had not offered to provide): see [187]-[188].

47. I was not referred to any Australian decision which has held that a form of ATE Policy provides adequate security for a defendant’s costs.

48. The second decision to which I was referred was Saxon Woods Investments Ltd v Costa and others [2023] EWHC 850 (Ch). In that case, Deputy Judge Agnello KC reviewed the United Kingdom authorities regarding the question as to whether an ATE Policy in favour of the plaintiff provided adequate security for the defendant’s costs, and said (at [33]):

“In summary the Court needs to be satisfied, when reliance is placed on an ATE insurance policy, there must not be terms pursuant to which or circumstances in which the insurers can readily but legitimately and contractually avoid liability to pay out for the defendant’s costs. This requires the court to form a view at this stage on (1) the meaning of the policy, and (2) on how readily it may be avoided legitimately and contractually, and (3) to form a view of the likelihood of circumstances arising which will enable the policy to be readily, legitimately and contractually avoided.”

49. In the present proceeding, the Plaintiffs urged that I should adopt the approach set out in this passage from Saxon Woods when assessing the adequacy of the ATE Policy as security for Tokio Marine’s costs. I do not consider that the approach stated in Saxon Woods differs significantly from the approach outlined and adopted by Yates J in Petersen. The critical question, where an ATE insurance policy is proffered as security, is whether that policy is adequate to achieve the object of providing a fund or asset against which a successful defendant can readily enforce an order for costs against the plaintiff. This in turn requires consideration of the terms of the policy, their meaning and effect, and an assessment of whether there is a risk that the insurer, acting in good faith but in its own commercial interests, could seek, on legitimately contestable grounds, to avoid, limit or reduce its liability under that policy in respect of any costs order made in the defendant’s favour.

Application of Principles

50. This is not a case, like DIF III Global or Tiaro Coal, where it is proposed that an overseas insurer will give a deed of indemnity directly to Tokio Marine by which the insurer will make an unconditional promise to pay in full the amount of any costs order made in Tokio Marine’s favour (up to the dollar figure for which security is sought). The Plaintiffs have confirmed in correspondence that a deed of that type is not being proffered.

51. However, the Plaintiffs argued that the ATE Policy was “substantially equivalent to the provision of an indemnity of the kinds that have been acceptable to Australian courts in the past”. They submitted that:

“When one considers the attributes of the present policy with its anti‑avoidance endorsement language, it has been turned into a product that brings together both insurance and indemnity effectively, the latter through the anti‑avoidance language in giving Tokio Marine the direct right of recourse.”

52. The thrust of the submission was that, by reason of the anti-avoidance endorsement in the ATE Policy (which is discussed below), BWIL was bound to pay the full amount of any costs order in Tokio Marine’s favour up to the Limit of Indemnity. The Plaintiffs said that “the Court can be comfortable [that] the ATE Policy is not capable of being readily, legitimately and contractually avoided, or indeed that there is any basis to doubt enforceability at all”.

53. It is therefore necessary to examine the terms of the policy, and to consider whether and to what extent there is doubt about their meaning and effect, or doubt about BWIL’s liability to meet any adverse costs orders made in Tokio Marine’s favour. In considering this issue, I have not sought to reach, and do not express, any concluded view regarding the proper interpretation of the ATE Policy (and, of course, no such view could in any case be binding on BWIL). Instead, I have sought to assess whether there is a basis on which BWIL, acting in good faith but in its own commercial interests, could, on legitimately contestable grounds, dispute that it was obliged to pay to Tokio Marine the full amount of any costs order made in its favour (up to the Limit of Indemnity) or whether, as the Plaintiffs submitted, the language of the ATE Policy “is simply too intractable for that”.

Insuring Clause

54. The insuring clause in the ATE Policy is in the following terms:

“COVER

We will indemnify the Insured in respect of Adverse Costs, up to the Limit of Indemnity or any applicable Sub-Limit of Indemnity, and subject to the Set-off and Under-Insurance provisions:

provided that:

1.    the Court makes an award of Adverse Costs against the Insured; or

2.    the Legal Proceedings are settled or discontinued with Our Consent.

Where the Court makes an award or awards of Adverse Costs against the Insured before the Legal Proceedings are finally concluded, then the most We will pay in respect of the aggregate of any such award will be any amount specified as the Interim Adverse Costs Sub-Limit of Indemnity in the Schedule. We shall not otherwise be liable to pay any Adverse Costs until the Legal Proceedings are finally concluded.”

55. The “Limit of Indemnity” was redacted in the copy of the ATE Policy that was tendered on the application. However, this figure has been provided to Tokio Marine. It was common ground that this Limit of Indemnity is sufficient to cover Tokio Marine’s cost for the Expanded First Phase of the proceedings. Tokio Marine expressed doubt that the Limit of Indemnity would be sufficient to cover its costs of the whole of the proceedings, but Tokio Marine accepted that this was not an issue which needs to be determined on the present application.

56. Instead, Tokio Marine raised two main issues about this clause: namely, the definition of the “Adverse Costs” covered by the Policy; and the time at which any liability to pay any claim in respect of Adverse Costs arises.

Definition of “Adverse Costs” – “fully mitigated costs”

57. By the “Cover” provision, BWIL indemnifies the Insured in respect of “Adverse Costs”, which are defined as follows:

“The fully mitigated costs of the Opponent in the Legal Proceedings, including Interim and Interlocutory Costs Orders, to the extent that they are enforceable and that the Insured is legally liable to discharge them.”

58. “Adverse Costs” are not defined as the costs specified in any costs order in favour of one of these Opponents, but instead as the “fully mitigated costs of the Opponent in the Legal Proceedings”. The “Opponents” are defined in the Schedule as Tokio Marine, IAL and BCC Trade Credit Pty Ltd.

59. The subordinate clause commencing “to the extent” provides a limit on the extent to which “the fully mitigated costs of the Opponent” are covered by the ATE Policy. In particular, cover is provided in respect of such costs “to the extent” that there is a legal liability to pay such costs. Accordingly, if the Plaintiffs are legally liable to pay an amount less than the amount of the “fully mitigated costs of the Opponent”, there will only be cover in respect of the amount of those costs for which the Plaintiffs are liable. Conversely, if the Plaintiffs are liable to pay an amount greater than the amount of the “fully mitigated costs of the Opponent”, the cover remains only in respect of the “fully mitigated costs” and not the higher amount of any costs order.

60. The term “fully mitigated” is not defined in the ATE Policy. An obligation to mitigate, in the ordinary meaning of the term, is an obligation to take reasonable steps to reduce exposure to loss or cost. An obligation to mitigate “fully” connotes that all such reasonable steps shall be taken.

61. In that regard, there are some provisions in the ATE Policy requiring the Insureds to take certain steps in respect of costs. For example, clause 4 of the ATE Policy (as amended by the Schedule) provides as follows:

“4.    Minimising Claims or Legal Proceedings

The Insured must take all reasonable measures to comply with the overriding objectives of the Civil Procedure Rules (or similar rules in force from time to time in the jurisdiction in which the legal proceedings take place) and to minimise the cost of Legal Proceedings.”

62. Further, clause 16(c) of the ATE Policy, as amended by the Schedule, provides that BWIL “may require any bills submitted to be certified or assessed by the Court or a Court-ordered mediator or costs assessor”.

63. Having regard to those matters, I consider that it would be open to BWIL, acting in good faith but in its own interests, to argue, on legitimately contestable grounds, that if an order is made for the payment of costs which did not represent “fully mitigated costs” (because, for example, the Plaintiffs had not taken steps which were reasonably available to reduce the quantum of the costs ordered), then the ATE Policy would not provide cover in respect of the full amount of that costs order.

64. For example, if Tokio Marine sought a gross sum costs order for 100% of its costs, and the Plaintiffs consented to an order in that amount without taking steps, which were available to them, to query the reasonableness of a costs order in that sum, it would be open to BWIL to adopt the position, on legitimately contestable grounds, that a costs order in that sum did not represent “fully mitigated costs” and therefore did not meet the definition of “Adverse Costs” which were covered under the ATE Policy.

65. An argument along those lines was advanced by an insurer in respect of a similarly-worded insuring clause in an authority to which the Plaintiffs referred regarding the meaning of the phrase “fully mitigated costs”: Denso Manufacturing UK Ltd v Great Lakes Reinsurance (UK) plc [2017] 1 Lloyd’s Rep IR 240 (Denso v Great Lakes). In that case, Denso, a defendant which had been successful in proceedings alleging breach of contract, brought a claim under the Third Parties (Rights Against Insurers) Act 1930 (UK) against Great Lakes, the ATE insurer of the unsuccessful plaintiff. The ATE policy provided, as here, that cover was provided in respect of “Adverse Costs” which were defined (similarly to the present case) as the “fully mitigated costs of the Opponent in the Legal Proceedings to the extent that the Insured is legally liable to discharge them” (at [37]).

66. Denso obtained a “default costs certificate” requiring the unsuccessful defendant to pay £319,696.59, and sought this amount from Great Lakes. Great Lakes argued that Denso had obtained a certificate which gave them the entirety of their costs rather than the smaller sum which would have been recoverable on the standard basis.

67. Denso’s claim failed because the Court found that Great Lakes was discharged from liability under the ATE policy by various breaches of conditions precedent on the part of the unsuccessful plaintiff (it should be noted that there was no provision in the policy equivalent to the Non-Avoidance endorsement, which is discussed below). However, of particular relevance for the present case is that Great Lakes advanced the following argument (recorded in the judgment at [137]):

“Further, Great Lakes says that the indemnity which Great Lakes agreed to provide by the insuring clause was an indemnity against the ‘fully mitigated costs of [Denso]’. The costs payable pursuant to the costs default certificate are, almost by definition, not the ‘fully mitigated costs of [Denso]’ but very much the reverse.”

68. This is the type of argument which I consider that it would be open to BWIL, acting in good faith, to advance on legitimately contestable grounds.

69. In response to this issue, the Plaintiffs argued that in the scenario described above, the Plaintiffs may have breached the terms of the ATE Policy in failing to take reasonable steps to reduce the quantum of the costs awarded in Tokio Marine’s favour, but that BWIL would be obliged nonetheless to pay the full amount of any such costs order to Tokio Marine. This was said to be due to the terms of the “Non-Avoidance of Policy” endorsement, which provides as follows:

“In each case subject to the Limit of Indemnity and General Exclusions 3, 4 and 17:

1.    The Insurer confirms that this Policy is non-voidable and non-cancellable and any claim made against it will be honoured in full irrespective of any exclusions or any provisions of the Policy or of the general law, which would have otherwise rendered the Policy or the claim unenforceable or entitled the Insurer to avoid, rescind, discharge, cancel or vitiate the Policy or avoid, reduce, exclude or deny cover or otherwise repudiate liability under the terms of the Policy. However, if any payment is, or has been made, under this policy which would not be paid due to a condition or exclusion of the wording, the Insurer reserves the right to reclaim such costs directly from the Insured.

2.    The Insured irrevocably authorises and instructs the Insurer to pay, and the Insurer agrees to pay, any claims payment to the opponents by paying such claims payment to such bank account as the Opponents may from time to time specify to the Insurer in writing. No instruction whether by the Insured or by any other person other than the Opponents to make payment to any other entity or account shall be honoured by the Insurer unless also independently given by the Opponents to the Insurer in writing.

3.    The arrangements contained in this Endorsement shall continue to apply notwithstanding the liquidation, insolvency or bankruptcy of the Insured.

4.    No material changes to the terms of the Policy which limit the cover available to the Insured (including but not limited to reductions of the Limit of Cover, reduction of the risks covered, or widening of the exclusions) shall be made without the written consent of the Opponents as well as of the Insured.

5. The parties to this Policy agree that irrespective of any other provisions of the Policy the terms of this Endorsement and this Policy are intended to benefit the Opponents and may be enforced by the Opponents directly pursuant to the provisions of the Contracts (Rights of Third Parties) Act 1999 (UK) and the Insurance Contracts Act 1984 (Cth). No other third party is entitled to the benefit of or to enforce any term of this Endorsement under any provision of the Contracts (Rights of Third Parties) Act 1999 (UK), the Insurance Contracts Act 1984 (Cth) or otherwise.”

70. The Plaintiffs contended that, in the scenario outlined above, the obligation to honour any claim “in full irrespective of … any provisions of the Policy …. which would otherwise have rendered … the claim unenforceable or entitled the Insurer to … avoid, reduce, exclude or deny cover” meant that BWIL could not rely on any failure by the Plaintiffs to comply with their contractual obligations in respect of mitigation so as to reduce or exclude BWIL’s liability to meet the full amount of any costs order which was made in Tokio Marine’s favour.

71. The Plaintiffs do not, of course, speak for BWIL and any interpretation advanced on this application would not be binding on BWIL. It is necessary to consider whether there is any doubt attaching to the Plaintiffs’ interpretation of the Endorsement and whether there might exist legitimately contestable grounds for BWIL to adopt a different interpretation.

72. In this regard, I accept Tokio Marine’s submission that the operation of the endorsement is not straightforward or free from doubt. In particular, it is unlikely that the endorsement was intended to have the effect that one disregards the terms of the insuring clause when determining BWIL’s liability for a claim. It is only possible to give content to BWIL’s promise that “any claim made against it will be honoured in full” by having regard to the terms of the ATE Policy which define those claims which BWIL is obliged to honour. Before one comes to consider whether there is any operative exclusion in respect of a claim, or whether there is any provision that allows the avoidance of liability for a claim, it is necessary to consider whether there is coverage in respect of that claim. BWIL could not, by the terms of the endorsement, be obliged to “honour” claims in respect of losses which are not in fact covered by the ATE Policy.

73. As I have explained above, if BWIL formed the view that reasonable steps to minimise the costs awarded in favour of Tokio Marine had not been taken by the Plaintiffs, then it would be open to BWIL to contend that its liability was only for the amount of the “fully mitigated costs” and not for the amount of the costs order actually made. Further, I consider that it would be open to BWIL to argue, on legitimately contestable grounds, that in adopting this position, it was not (within the meaning of the endorsement) relying on a provision of the ATE Policy to avoid, reduce, exclude or deny cover for “Adverse Costs”, but was instead relying on the Insuring Clause and the definition of “Adverse Costs” to identify the extent of its obligation to “honour” any claim “in full”.

74. One further matter to note is that the exclusions in the ATE Policy include General Exclusion 14, which provides as follows:

“This insurance does not cover the following:

...

14.   Any costs incurred or increased as a result of a failure on the part of the Insured or the Solicitor to mitigate a liability in respect of Adverse Costs.”

75. The Plaintiffs contended that the effect of the “Non-Avoidance of Policy” endorsement was that the only exclusions on which BWIL could rely were General Exclusions 3, 4 and 17 (none of which was alleged to present any problem for payment of a costs order in Tokio Marine’s favour). On this interpretation, other exclusions – such as General Exclusion 14, set out above – can have no application.

76. Having regard to the principle that exclusion clauses are generally construed on the basis that they “must cut out something already included by the general recital and provisions” (Lake v Simmons [1927] AC 487 at 507; referred to and applied by Meagher JA (with whom Bathurst CJ and Beazley P agreed) in Malamit Pty Ltd v WFI Insurance Ltd [2017] NSWCA 162 at [22]), a person seeking to claim the full amount of any adverse costs order against BWIL might contend that the better interpretation of the Policy is that, whether steps to mitigate have been taken or not, the full amount of any such costs order is captured by the “Cover” provided in respect of “Adverse Costs”, and that coverage for the portion representing the increase in costs due to any failure to mitigate is excluded by General Exclusion 14 (which is not one of the exclusions specified in the endorsement as having operation as against Tokio Marine).

77. However, there would be countervailing arguments available to BWIL.

78. First, there is the argument based on the language of the insuring clause, and in particular the meaning of the term “fully mitigated costs”, which I have outlined above. It would be open to BWIL contend that General Exclusion 14 has been included, out of an abundance of caution, to ensure that, if the Plaintiffs fail to take reasonable steps to reduce the amount of any costs order, BWIL has no liability above the amount of the fully mitigated costs. In that regard, it has been recognised that it may be appropriate to interpret words in a way that makes them redundant, such as where the alternative construction is inconsistent with the commercial purpose of the contract or where it appears that the words have been included out of an abundance of caution: AFC Holdings Pty Ltd v Shiprock Holdings Pty Ltd [2010] NSWSC 985 at [13] per Ball J; quoted with approval in XL Insurance Co SE v BNY Trust Company of Australia Ltd [2019] NSWCA 215 at [72] per Gleeson JA (with whom Bell P and Emmett AJA agreed).

79. Secondly, it might be argued that General Exclusion 14 was not directed at the situation where the Plaintiffs fail to take reasonably available steps to contest and reduce the quantum of a costs order in favour of Tokio Marine, but instead to the situation where the Plaintiffs have failed to mitigate costs incurred by Tokio Marine during the underlying legal proceedings, such as by taking unreasonable steps which caused additional costs to be incurred by Tokio Marine. An argument along these lines was advanced in respect of a substantially similar exclusion clause in Denso v Great Lakes (at [138]).

80. I do not need to, and I do not, express any view on this application as to which competing interpretation would be correct. It is sufficient, for present purposes, that there exist legitimately contestable grounds on which BWIL, acting in good faith but in its own interests, could contend that it was not obliged to meet the full amount of an adverse costs order in the event that it formed the view that reasonable steps to mitigate the quantum of costs had not been taken. That is so notwithstanding the terms of the anti-avoidance endorsement. I do not accept the Plaintiffs’ submission that the language of the ATE Policy is “simply too intractable” to permit any such argument legitimately to be advanced.

Time when payment falls due

81. The second main issue raised by Tokio Marine in relation to the “Cover” clause in the ATE Policy is that, leaving aside costs orders in respect of interlocutory disputes, the Insurer is not “liable to pay any Adverse Costs until the Legal Proceedings are finally concluded”. Tokio Marine pointed out that the term “finally concluded” is not defined, and that the Insurer might adopt the view that it is not obliged to pay any amount to Tokio Marine in respect of any costs order made at first instance until after all possible avenues of appeal are exhausted.

82. The Plaintiffs submitted that the suggestion that a judgment is only “final and conclusive” after all appeals or appeal rights are exhausted is not seriously arguable, referring to Colt Industries Inc v Sarlie (No 2) [1966] 1 WLR 1287 and Kuligowski v Metrobus (2004) 220 CLR 363; [2004] HCA 34 at [25]. In the latter case, the High Court said (at [25], citations omitted) that:

“A ‘final’ decision … is one which is not of an interlocutory character, but is completely effective unless and until rescinded, altered or amended. The fact that an appeal lies from a decision does not make it any less final. It must be ‘final and conclusive on the merits’: ‘the cause of action must be extinguished by the decision which is said to create the estoppel’.”

83. The question as to when a decision is “final” as a matter of law is not determinative of how a reference to proceedings being “finally concluded” is to be interpreted in a commercial contract. Such a question of interpretation must always be considered by having regard to the particular words used, in the context in which they appear. Part of the context in the present case is the term of the ATE Policy headed “Period of Insurance”, which (as amended by the Schedule) describes one of the situations in which Cover may cease as follows:

“the Legal Proceedings are concluded (including liability for and assessment of legal costs in relation to the Legal Proceedings) by a judgment of the Court of first instance or following an appeal to which We have given Consent”.

84. The term “Legal Proceedings” is defined as the “legal action brought by the Insured to pursue money or damages in compensation or any other relief and which is the subject of the Retainer”.

85. I consider that there would be legitimately contestable grounds for BWIL to argue that, given that the ATE Policy refers to the “Legal Proceedings” being concluded either by a judgment at first instance or by an appeal, the “legal action” which constitutes the “Legal Proceedings” (as defined) must comprise both the proceeding at first instance and any appeal therefrom; and therefore, for the purposes of the “Cover” clause, BWIL’s liability to pay “Adverse Costs” at the time when the “Legal Proceedings are finally concluded” is a liability to pay such claim only at the point in time when the “legal action” finally comes to an end, which can only occur when appeal rights are exhausted.

86. Again, I do not consider that this is an argument which would be precluded by the terms of the “Non-Avoidance of Policy” endorsement. It would be open to BWIL to argue that the obligation in the Endorsement to “honour” any claim “in full” would not require BWIL to make any payment in respect of a claim before the time when, in accordance with the “Cover” provision of the ATE Policy, it is obliged to do so; and that in complying with the terms of the “Cover” provision regarding the time for payment “in full”, it would not be (within the meaning of the endorsement) relying on any provision of the Policy to “avoid, reduce, exclude or deny cover”.

Termination provision

87. A further issue raised by Tokio Marine concerns Condition 3 of the ATE Policy, which is headed “Termination”. It provides as follows:

“The Policy will terminate if the Insured or the Solicitor terminates any Retainer, unless We provide Our Consent to the Policy continuing.

We may cancel the Policy by giving fourteen days’ notice in writing to the Insured and the Solicitor if:

a)    the Insured fails to comply with the terms of any Retainer;

b)    the Insured does not follow the Solicitor’s recommendations with regard to the progression or settlement of the Legal Proceedings;

c)    the Insured does not follow Our recommendations with regard to the settlement of the Legal Proceedings;

d)    the Insured rejects the Solicitor’s advice to discontinue the Legal Proceedings;

e)    the Insured fails to comply with the terms of this Policy or fail to give proper instructions so that the Solicitor complies with the terms of this Policy;

f)    the Legal Proceedings are stayed, discontinued, abandoned or withdrawn by virtue of the bankruptcy, receivership, administration, liquidation, entering into a voluntary arrangement or other act or threatened act of insolvency of the Opponent.

If the Policy is terminated or cancelled, We shall have no obligation to make any payment save in respect of Adverse Costs ordered prior to the termination or cancellation of the Policy.”

88. Tokio Marine pointed out that this clause distinguishes between circumstances in which the policy automatically terminates without any step being taken by BWIL (“The Policy will terminate…”) and circumstances in which BWIL has an option to cancel the policy which requires the provision of 14 days’ written notice (“We may cancel the Policy…”). The language of the final two lines of Condition 3 draws a distinction between termination and cancellation, although in either circumstance the outcome is the same, namely, that BWIL “shall have no obligation to make any payment save in respect of Adverse Costs ordered prior to the termination or cancellation of the Policy.”

89. Tokio Marine argued that this clause exposes it to the risk that at an advanced stage of the proceeding the Plaintiffs or the Solicitor might terminate the Retainer, with the result that the ATE Policy would automatically terminate without any further step by any party, and BWIL would have no liability for any costs of these proceedings (other than costs orders made in respect of interlocutory applications) because there had been no “Adverse Costs ordered prior to the termination … of the Policy”.

90. The Plaintiffs responded that it would not be open to BWIL, acting in good faith, legitimately to take such a position, having regard to the terms of the “Non-Avoidance of Policy” endorsement.

91. However, as Tokio Marine pointed out, this endorsement provides that the Policy “is non-voidable and non-cancellable”, but does not state that the Policy may not automatically terminate in accordance with its terms in the circumstances described in Condition 3. The endorsement prevents BWIL from relying on “any provisions of the Policy” to “avoid, rescind, cancel or vitiate the Policy”. There would be an open issue as to whether BWIL would be seeking to “avoid, reduce, cancel or vitiate the Policy”, or would be seeking to “avoid, reduce, exclude or deny cover or otherwise repudiate liability under the terms of the Policy”, by relying on a provision which had the effect that the Policy automatically terminated at a point in time before there was any liability for Adverse Costs, and which had the effect that there was no cover and no liability in respect of an order for costs made thereafter. I am not satisfied that the language of the ATE Policy is, as the Plaintiffs submitted, “simply too intractable” to permit any legitimate debate regarding whether BWIL would have any continuing obligation under the ATE Policy in such circumstances.

ATE Policy does not provide adequate security

92. The aspects of the ATE Policy which have been addressed above undermine its ability to achieve the objective of the provision of security for costs, as described by Hargrave J in DIF III Global (at [38]), namely, “to provide a fund or asset against which a successful defendant can readily enforce an order for costs against the plaintiff”.

93. In particular, there would be a risk that if Tokio Marine sought to enforce a costs order by exercising rights under the ATE Policy and, in response, BWIL argued that the quantum of costs ordered did not represent the “fully mitigated costs of [Tokio Marine]”, such enforcement proceedings might give rise to an extended debate about the extent to which the amount of costs ordered in Tokio Marine’s favour could have been reduced if reasonable steps to reduce the quantum of costs had been taken by the Plaintiffs (which, in turn, could require a detailed analysis of the reasonableness of costs incurred by Tokio Marine). Further, if BWIL were successful in arguing that there was no liability to pay the amount of any costs order made at the conclusion of proceedings at first instance, until the point in time when appeal rights were exhausted, it might be that, far from being able to “readily” enforce a first instance costs order, Tokio Marine might be delayed in receiving any payment in respect of such costs for a lengthy period. In addition, there is a risk that, if the Retainer were terminated at any point in time while the proceedings are continuing, BWIL would contend that the ATE Policy has come to an end and that it has no liability to honour any claim in respect of a costs order subsequently made. This could lead to satellite litigation between Tokio Marine and BWIL.

94. Accordingly, I do not accept the Plaintiffs’ submission that the ATE Policy in this case is substantially equivalent to the provision of an indemnity of the kind that was found acceptable in DIF III Global. In that case, Hargrave J (at [76]) found that the terms of the deed of indemnity proffered as security were such that it was “akin to the form of bank guarantee”, being “an unconditional promise by deed to pay the defendants the amount of any costs order”. I am not satisfied that the same can be said of the ATE Policy in this case, having regard to the matters outlined above. Instead, I consider that, as was found to be the case in Petersen, security for Tokio Marine’s costs in the form of the ATE Policy would present greater risk for Tokio Marine than an unconditional and irrevocable indemnity from BWIL in respect of any costs order made in Tokio Marine’s favour.

92. In Saxon Woods, an ATE insurance policy was found to provide sufficient security in circumstances where there was a non-avoidance endorsement. However, there is no indication in the reasons for judgment in that case, one way or the other, as to whether the coverage under the policy was limited to “fully mitigated costs”, or as to whether the insurer was liable to pay only when the legal action “finally concluded”, or as to whether the policy provided for automatic termination in the event that the solicitor’s retainer was terminated, with no liability in respect of any costs order made after that point in time.

93. Given the Plaintiffs bear a “practical onus” of establishing that the proposed security is adequate, I am not persuaded, having regard to the issues outlined above, that the ATE Policy provides sufficient security for Tokio Marine’s costs of this proceeding.

Further issues regarding the ATE Policy

97. Tokio Marine also raised various issues regarding the potential difficulties involved in commencing proceedings against BWIL for moneys due under the ATE Policy, or in enforcing any judgment against BWIL in Guernsey, and regarding the ability of BWIL to meet any such judgment. In response, the Plaintiffs pointed out that:

1. whether the proper law of the ATE Policy was that of the United Kingdom or of Australia, Tokio Marine would be entitled to enforce rights under the ATE Policy pursuant to either s 48 of the Insurance Contracts Act 1984 (Cth) or s 1 of the Contracts (Rights of Third Parties) Act 1999 (UK);

2. there was unchallenged expert evidence, led by the Plaintiffs, regarding the steps required to register and enforce a judgment in Guernsey;

3. the Plaintiffs offered to pay $20,000 into Court (or such higher sum as the Court should think appropriate) in respect of the costs of registering and enforcing a judgment in Guernsey; and

4. although there was no evidence of BWIL’s current balance sheet or cash reserves, there was evidence that BWIL is included in the consolidated accounts of Burford, which is also registered in Guernsey, and that the group had net income of some US$237.885m in the six months to 30 June 2023.

98. Nonetheless, as was observed by Bond JA in Adeva Home Solutions, there is inevitably some risk of cost and delay associated with making demands against a foreign-based insurer; commencing proceedings on the deed if demands are not met; obtaining judgment in Australia; registering that judgment overseas; and then possibly taking enforcement action (see [63], [67], [68]).

99. I do not need to assess the extent of any risks in respect of enforcement in the present case. That is because the issues which have been outlined above regarding the terms and operation of the ATE Policy mean that, before one even gets to the issue of the enforcement, I am not satisfied that the ATE Policy is adequate to achieve the object of security for costs.

100. The Plaintiffs submitted that, if I formed the view that there were issues with the security proffered, I should take the course adopted by Gleeson JA in Tiaro Coal. As noted above, his Honour there identified aspects of the proposed deed of indemnity which were ambiguous or uncertain in their operation, and held that security should be provided either by way of a payment into Court, or by way of a deed of indemnity which was amended so as to address the identified areas of uncertainty.

101. However, it is one thing to propose amendments to a deed of indemnity. It is another to propose amendments to an insurance policy and, in particular, to the clause of an insurance policy which specifies the matters in respect of which cover is provided. Such an amendment would go to the very heart of nature and extent of the risk underwritten by the Insurer, which is in turn centrally relevant to the commercial decision to insure and the calculation of the premium required as the price for underwriting that risk. I do not consider that it is appropriate for the Court to propose amendments to the scope of cover offered under a policy of insurance.

102. The Plaintiffs also submitted that the Court should proceed on the basis that money was spent to procure the ATE Policy and that, if security were to be ordered in the form sought by Tokio Marine, then that would require additional funds on top of the moneys which have already been spent. They submitted that this “duplication of costs” would not be something that the Court would be minded to order having regard to the requirements of the Civil Procedure Act unless the security proffered was found to be “so inadequate that the additional cost was justified having regard to the interests of justice”. In that regard, there was some debate at the hearing as to whether or not the ATE Policy was cancellable or not, and, if it could be cancelled, whether any part of the premium was recoverable.

103. However, that seems to me to be beside the point. I have reached the view that security in the form of the ATE Policy is inadequate. In those circumstances, the fact that resources were expended by the Plaintiffs in obtaining the ATE Policy, which was their own forensic and commercial choice, will not change the position that the ATE Policy is an inadequate form of security and that Tokio Marine is entitled to security for its costs in an adequate form. In any case, there was no evidence that the premium for the ATE Policy was paid by the Plaintiffs, who are said to have no cash and no income. One possibility which has not been excluded (in circumstances where there is no evidence of the terms of the funding agreement or of the means by which the premium under the ATE Policy was paid) is that the funder, Burford, is obliged to pay any adverse costs order under the terms of the funding agreement, and has chosen for its own commercial reasons to lay off this risk to a related entity, BWIL, in return for the premium paid under the ATE Policy. If so, all that would have happened is a reallocation of risk and funds within a large corporate group.

104. Having regard to the matters set out above, I will make orders requiring security to be provided either by payment of funds into court or by way of a bank guarantee from an Australian bank or other authorised deposit-taking institution.

Quantum of Security

105. There was general agreement on the applicable principles regarding the quantum of security. They were conveniently summarised by Ward J (as her Honour then was) in Vertical Australia Pty Ltd v Air Company Vertical T-LLC [2012] NSWSC 719 at [106] as follows:

1. fixing the amount of security to be provided is part of the exercise of the Court’s discretion (Fiduciary Ltd v Morningstar Research Pty Ltd [2004] NSWSC 664);

2. the Court should order such sum as the court thinks just, having regard to all the circumstances of the case (Allstate Life Insurance Co v Australia & New Zealand Banking Group Ltd (No 19) [1995] FCA 1778; (1995) 134 ALR 187 at 197; Wollongong City Council v FPM Constructions Pty Ltd [2004] NSWSC 523 at [50]; Morris v Hanley [2001] NSWCA 374 at [10]);

3. the Court should fix an amount that it considers will be adequate for the services to be rendered (Sunday Times Newspaper Company Ltd v Mcintosh (1933) 33 SR (NSW) 371 at 373);

4. the objective in making an order for security for costs is not to provide a defendant with a full indemnity against all eventualities in the proceedings (Bryan E Fencott & Associates Pty Ltd v Eretta Pty Ltd (1987) 16 FCR 497 at 515; Brundza v Robbie & Co (No 2) [1952] HCA 49; (1952) 88 CLR 171 at 175) but, rather, the objective is to assess what is “sufficient” security (Idoport Pty Ltd v NAB Ltd [2001] NSWSC 744 at [38]; Brundza at 175);

5. the applicant for security bears the onus of adducing evidence that enables the Court to estimate the costs of litigation (MHG Plastic Industries Pty Ltd v Quality Assurance Services Pty Ltd [2002] FCA 821 at [31]-[34]); and

6. the Court is not bound to accept the applicant’s estimate of the costs likely to be incurred (MA Productions Pty Ltd v Austarama Television Pty Ltd (1982) 7 ACLR 97 at 100; Plaza Print Pty Ltd v South British Insurance Co Ltd (1984) 68 FLR 340 at 344).

106. The parties agreed that, in determining the appropriate quantum of security, the Court is not required to attempt its own detailed costs assessment, but can adopt a “broad brush” approach having regard to the available evidence: Wollongong Coal Pty Ltd v Gujarat NRE Properties Pty Ltd [2019] NSWSC 187 at [54] per Ward CJ in Eq.

107. Tokio Marine sought security in respect of both past and future costs of the Expanded First Phase of the proceedings. It contended that this was appropriate in circumstances where the application was brought promptly, in the early stages of the litigation, after extensive prior attempts through correspondence to resolve the issue of security. The Plaintiffs did not dispute this contention, or otherwise advance any submission to the effect that past costs should be disregarded when considering the quantum of security.

108. Tokio Marine relied on affidavits of its solicitor, Ms Penelope Taylor, and of a specialist costs lawyer, Ms Kerrie-Ann Rosati. Ms Taylor provided a breakdown of the elements comprising her estimate of Tokio Marine’s costs for the Expanded First Phase of the proceedings, and Ms Rosati expressed opinions regarding the reasonableness of the rates charged, regarding various factors relevant to the recoverability of the costs incurred by Tokio Marine, and regarding the extent of the reductions to be applied to professional fees and counsel’s fees in order to determine the amount likely to be allowed on an assessment of costs on a party/party basis. Ms Rosati concluded that it would be appropriate to reduce professional fees by 20%, and to reduce counsel’s fees by reducing the rates for Senior Counsel and by then applying a reduction of 15%.

109. Ms Rosati expressed these opinions based on Ms Taylor’s initial estimate of the costs of the Expanded First Phase of the proceedings, provided in September 2023. Ms Taylor subsequently prepared a revised estimate of the costs of this phase of the proceedings in late February 2024. Ms Rosati did not prepare an updated report in respect of the recoverability of the costs stated in the revised estimate. Tokio Marine contended that the percentage reductions identified in Ms Rosati’s report should simply be applied to the updated costs estimate in determining the amount of security. This resulted in the figure of $1,394,940, being the amount of security sought by Tokio Marine on this application.

110. The Plaintiffs did not retain any expert costs consultant to respond to Ms Rosati’s report.

111. The Plaintiffs made three main submissions as to why the quantum of security should be considerably lower than the amount sought by Tokio Marine.

Extent of reduction applied to solicitors’ costs

112. First, the Plaintiffs submitted that “an order for security for costs that assumes a recovery rate of 80 percent [for solicitors’ costs] is too high”. The Plaintiffs pointed out that Ms Rosati had, in her report, identified “several instances where costs incurred in this particular matter were or may be unreasonable and in some cases this was because of the size of the team and issues associated with duplication”.

113. I accept that Ms Rosati identified several such instances in paragraph 78 of her report. However, Ms Rosati expressly took the matters in that paragraph into account in coming to the view that a reduction of 20% was appropriate. Further, this was within the range of deductions which Ms Rosati identified is, in her extensive experience, usually applied to solicitors’ costs (namely, 15 to 35%).

114. The Plaintiffs submitted that it is “generally accepted” that “a successful party can expect to recover somewhere between 65% and 75% of its costs” and that it “is appropriate in those circumstances to apply a recovery rate of 65% to the incurred and estimated solicitors’ costs”.

115. Ms Rosati was not cross-examined on her opinions regarding the range of recovery for solicitors’ costs or regarding where the present case fell within that range.

116. Nonetheless, I am concerned that Ms Rosati’s opinion regarding the likely extent of recovery was expressed at a point in time when the total solicitors’ costs for the first phase of the proceedings were estimated to be $472,912.50. The estimate of solicitors’ costs for the “Expanded First Phase” has now increased by around 275% to $1,297,800 (comprising $696,000 in past costs and $601,800 in future costs). I do not consider it can safely be assumed that Ms Rosati’s opinion regarding the likely extent of recovery in respect of the initial estimate for the Expanded First Phase can readily be applied to the substantially greater estimate for the same phase, which she has not considered.

117. In those circumstances, I have reached the view that the quantum of security should be determined on the basis that Tokio Marine will recover 70% of its solicitor’s costs. This is within the range identified by Ms Rosati. It also the midpoint of the range proposed in the Plaintiffs’ submissions (65-75%), which was consistent with the evidence of Tokio Marine’s solicitor, Ms Taylor, who deposed that in her experience “it is reasonable for a party to expect to recover between 65 and 75% of solicitors’ fees”.

118. The Plaintiffs did not dispute the reductions applied to counsel’s fees or other disbursements.

119. An assumption that Tokio Marine would recover 70% of its solicitors’ costs would reduce the total amount of security by some $129,780 (representing 10% of the total estimate of solicitors’ costs for the Expanded First Phase).

Estimated future investigation costs

120. Secondly, the Plaintiffs queried Tokio Marine’s estimated future costs of investigating the commodity trades at issue in the proceedings.

121. The Plaintiffs submitted that some investigation work had already been done for the purposes of the pleadings and that this work was captured in past costs. In that regard, Ms Rosati stated in her report that the trades were closely analysed as part of the preparatory work for drafting the Commercial List Response.

122. So far as future investigation costs in relation to the trades were concerned, the Plaintiffs submitted that they had the onus of establishing that the trades occurred, and were in the process of compiling evidence (which is due to be served in July 2024), and that it may well be the case that the factual issues genuinely in dispute narrow after receipt of that evidence.

123. In response, Tokio Marine observed, correctly, that it is the expectation in this List that a defendant will not sit around and await the service of a plaintiff’s evidence before taking steps to investigate the matters alleged in the Commercial List Statement. I agree that Tokio Marine could not be criticised for acting, consistently with the overarching purpose, to investigate the factual matters at issue in these proceedings so that it is in a position to serve its evidence as soon as is reasonably practicable after receipt of the Plaintiffs’ material.

124. However, there must be a real prospect that, on receipt of the Plaintiffs’ evidence, the factual issues in dispute will be narrowed, and consequently the extent of investigations into the trades will be narrowed. Further, I am concerned that the estimate of the costs for future investigations has substantially increased, from $145,000 in Ms Taylor’s initial estimate to $340,000 in her revised estimate. This is said to be due to Ms Taylor realising that “the size of complexity of these tasks is substantially greater than what I anticipated”. She explains that there is a need to make enquiries with overseas entities, some of which are in liquidation and cannot readily be found, and a need to investigate each step of the transaction, sometimes with the help of translators. However, it is not clear why an increase in investigative steps requires a substantial increase in the time of senior lawyers working on the matter. For example, the estimate of the time required for a person at the level of “Special Counsel” (being the highest level of professional below partner) to investigate trades has increased from 60 hours to 200 hours, in a context where it is estimated that some 400 hours of “Solicitor” time will be spent on the task. There is no explanation of why there would be a need for such extensive senior involvement on these investigatory steps.

125. Given those matters, and having regard to the principles outlined in paragraphs 105-106 above, I would allow a reduction of around one-third in the amount allowed for the costs of the future investigations in relation to the commodity trades, from $340,000 to $230,000. After allowing for the assumed recovery rate of 70%, this $110,000 reduction would result in a reduction of $77,000 in the amount of the security.

Increase in cost estimates for Expanded First Phase since September 2023

126. Thirdly, the Plaintiffs pointed out that, between September 2023 and February 2024, various other aspects of the costs estimate for the Expanded First Phase had increased considerably, without any detailed explanation being provided for the increase. In particular:

1. the cost of reviewing further pleadings and taking further steps as a result of that review and conferring with Counsel has increased from $5,000 to $14,500, with both of those estimates being based on the assumption that the Plaintiffs would file a Reply (which has not occurred);

2. the cost of ongoing inter-partes correspondence has increased from $20,000 to $40,400, to take into account various matters including “an extended period until the anticipated close of pleadings” and the “seeking of particulars in relation to the Plaintiffs’ reply” (noting, again, that there is no Reply);

3. the cost of reporting to the client has increased from $10,000 to $26,200 and the costs of conferring with counsel has increased from $10,000 to $22,600 with the only explanation being that this is Ms Taylor’s “current assessment of anticipated communications” having regard to “my increased estimate of the workload overall”; and

4. other disbursements have increased from $50,000 to $100,000 “particularly as regards experts and investigators” (and in that regard, I refer to the comments above regarding the scope of the future investigations).

127. The Plaintiffs also referred to the substantial increase in initial evidence preparation costs, from $40,000 to $128,500. However, the effect of this increase is to bring into the Expanded First Phase a greater proportion of Tokio Marine’s costs of preparing evidence, which would otherwise be expended in subsequent phases (and which therefore might be the subject of subsequent applications for security).

128. I do not propose to undertake a line-by-line assessment of costs. The parties were in agreement that the Court should adopt a “broad brush” approach in assessing an amount that will represent sufficient security.

129. Having regard to the issues raised above, I propose to order that an amount of $1,150,000 be provided by way of security for Tokio Marine’s costs of the Expanded First Phase. This has been calculated by taking the amount sought by Tokio Marine ($1,394,400); making deductions I have indicated in respect of the rate of recovery for solicitors’ costs ($129,700) and future investigation costs ($77,000); and by deducting a further amount of $37,700 (representing around one half of the increases in estimates which are set out in paragraph 126 above, to which a reduction is then applied to allow for the recovery of 70% of solicitors’ costs).

Orders

130. In circumstances where Tokio Marine has been successful in respect of the issues about the form of security, but where I have accepted (in part) issues raised by the Plaintiffs about the quantum of security, I consider it appropriate that there be no order as to the costs of the application.

131. For the reasons given above, I make the following orders.

1. The Plaintiffs provide security for the costs of the Second Defendant in the amount of $1,150,000 for the “Expanded First Phase” of the proceedings as described in the affidavits of Ms Taylor sworn on 12 September 2023 and 21 February 2024.

2. The security referred to in order 1 be provided:

1. within 14 days of the date of these orders; and

2. either by way of payment into Court or by way of an unconditional guarantee from an Australian bank or other authorised deposit-taking institution.

3. In the event that the Plaintiffs fail to provide security in accordance with orders 1 and 2 above, the proceedings against the Second Defendant be stayed until further order of the Court.

4. The Second Defendant have liberty to apply to the Court for further security for its costs incurred or to be incurred after the Expanded First Phase.

5. There be no order as to the costs of the Second Defendant’s Amended Notion of Motion filed on 11 April 2024.

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Decision last updated: 08 May 2024