Iddles v Fonterra Australia Pty Ltd
[2021] VSC 609
•29 July 2021
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
GROUP PROCEEDINGS LIST
S ECI 2020 02588
| LYNDEN IDDLES & ANOR (according to the attached Schedule) | Plaintiffs |
| v | |
| FONTERRA AUSTRALIA PTY LTD (ACN 006 483 665) & ORS (according to the attached Schedule) | Defendants |
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JUDGE: | Efthim AsJ |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 16 and 17 June 2021 |
DATE OF JUDGMENT: | 29 July 2021 |
CASE MAY BE CITED AS: | Iddles & Anor v Fonterra Australia Pty Ltd & Ors |
MEDIUM NEUTRAL CITATION: | [2021] VSC 609 |
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SECURITY FOR COSTS – Group proceeding – Form and quantum of security – Litigation funder – Proposed form of security as undertaking or deed of indemnity plus cash bond – Risk that litigation funder or insurer affected by COVID-19 and Brexit – Whether risk necessitates alternative form of security – Whether form of security adequate, imposes unacceptable disadvantage upon defendants – Undertaking and payment into Court held to be adequate – Trailer Trash Franchise Systems Pty Ltd v GM Fascia & Gutter Pty Ltd [2017] VSCA 293 – DIF III Global Co-Investment Fund, L.P. v BBLP LLC [2016] VSC 401 – Roo Roofing Pty Ltd & Anor v Commonwealth of Australia [2017] VSC 694.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | Mr LWL Armstrong QC, with Ms LJ Keily | Adley Burstyner |
| For the Defendants | Mr PG Liondas with Ms L Dawson | Arnold Bloch Leibler |
HIS HONOUR:
The defendants seek orders for security for costs up to the completion of discovery by the defendants in the sum of $1,240,430. They also seek that the amount of $200,000, ordered as security up to the completion of pleadings, be paid into an interest-bearing account controlled by each party’s solicitors, secured by way of bank guarantee, or provided in such other form as the Court considers appropriate. This order is sought in place of an undertaking given to Court that the plaintiffs will satisfy an order for costs up to the amount of $200,000.
The plaintiffs do not oppose an order that security be given. There are two issues before the Court – the quantum and the form of security.
Quantum
The defendants apply for an order seeking security in the sum of $1,240,430. In their summons and in their written submissions the amount sought was $1,159,145. However on 21 May 2021 their solicitor, Matthew David Lees, revised the estimate to $1,240,430.
The plaintiffs’ solicitor, David Sandor Burstyner, in an affidavit sworn 6 June 2021, estimated security at $668,438. In a further affidavit on 15 June 2021, he considered three items again (known as D1, D2 and D3 of the estimate provided by Mr Lees). Senior counsel informed the Court that the plaintiffs’ reassessment of those items, and if the defendants’ weighted average of $417.00 per hour for work done used by Mr Lees was adopted, would result in an estimate of costs for discovery in the sum of approximately $800,000.
The range of security that should be awarded according to the parties is between $1,240,430 and $800,000.
The principles to apply in determining the amount of security were referred to by the Court of Appeal in Trailer Trash Franchise Systems Pty Ltd v GM Fascia & Gutter Pty Ltd.[1] Tate and Kyrou JJA stated:
In determining a sufficient amount for security for costs, the court does not undertake precise mathematical calculations. Rather, it adopts a ‘broad brush’ approach involving ‘guesstimates as much as estimates’. However, the broad brush approach does not involve an abstract process. It must have an evidentiary basis. The court must have regard to the evidence adduced by the parties as to quantum — whether in the form of an affidavit by an experienced litigation lawyer or an expert report by a costs consultant — although it is not bound by the parties’ estimates. The court may scrutinise the individual items in the parties’ estimates, but not to the extent of minute examination akin to a taxation.
The amount ultimately fixed by the court must not be so low that it fails to provide any real protection to the party seeking security, or so high that it is oppressive to the party required to provide the security. The amount must be ‘just and reasonable’ in all the circumstances of the particular case.[2]
[1][2017] VSCA 293.
[2]Ibid [64]-[65].
The defendants rely on estimates prepared by Mr Lees, who deposes that he has been admitted to practise as a legal practitioner for 17 years and has had the carriage of large and complex litigation matters in this Court and others, including group proceedings. The estimates are based on his experience in conducting, or being involved in, numerous large discovery processes, including class actions in this Court and in other Australian courts. He also has experience in acting for clients in relation to the assessment of taxation of costs in complex commercial litigation. He has drawn on that experience in providing his estimates.
Mr Lees also deposes that he previously estimated the defendants’ costs on a party/party basis, up to and including defences, would be approximately $270,000 to $290,000. To date the only security for costs provided is an undertaking by the plaintiffs’ funder, LLS Fund Services Pty Ltd as trustee for Litigation Lending (‘LLS’), “up to the amount of” $200,000. A copy of that undertaking was sent play the plaintiffs’ solicitor and is noted in the “Other Matters” section of the orders of Nichols J on 21 September 2020.
Counsel for the defendants advised the Court that as matters transpired the actual costs incurred were much greater and, on a party/party basis, were estimated to be about $400,000. It is asserted that Mr Lees had effectively underestimated the costs by 25% to 30%. The defendants submit that, as Mr Lees has previously erred on the low side rather than the high side, that should give the Court additional confidence that “he’s not over-egging the pudding here.”[3]
[3]Transcript of Proceedings, Iddles v Fonterra Australia Pty Ltd (Supreme Court of Victoria, Efthim AsJ, 16 June 2021) 75 (PG Liondas).
The plaintiffs submit that there is no explanation as to the reasons why the work that was initially estimated to cost $200,000 ended up costing closer to $400,000, and there is no way for the plaintiffs to assess whether it was the original estimate that was reasonable or the asserted final costs estimate that was reasonable. They say that there is not enough material before the Court from which I could form a view in that regard.
I accept that Mr Lees may have been conservative in determining the costs in relation to the pleadings, but that does not mean that his estimate in relation to discovery will also be conservative.
The plaintiffs agree that the task of the defendants of retrieving and reviewing documents for discovery and production is a substantial task. The defendants tried to restrict the scope of the discovery but the plaintiffs argued against it. The plaintiffs submit that the question before the Court is whether the costs that have been forecast reflect the work being done efficiently.
The plaintiffs challenged the hourly rate of $417 adopted by Mr Lees for the purpose of his estimate. The current Supreme Court scale of costs allows for a charge of $42.50 for six minutes, equating to $425 per hour. The current scale for an attendance requiring legal skill and knowledge by an employee of a legal practice who is not a legal practitioner is $32.50 for six minutes, equating to $325 per hour.
There are six persons reviewing the emails for email discovery in this matter, which consists in four legal practitioners and one law graduate and in addition to Mr Lees. The rate to be charged if all of those persons worked on discovery and all did the same hours would be $408 per hour (5 x $425 + 1 x 325 = $ 2,450/6 = $408.33 per hour). A rate of $417 per hour is not unreasonable.
The plaintiffs submit that when determining the hourly rate I should take into account Armstrong Scalisi Holdings Pty Ltd v Piscopo,[4] where Rares J in an application for security for costs observed that the total estimate for security appeared to be very large, involving the participation of a high number of solicitors in performing work at rates exceeding counsel’s rate for tasks that appeared, primarily, to be the responsibility of counsel.
[4][2017] FCA 423.
In CJMcG Pty Ltd as Trustee for the CJMcG Superannuation Fund v Boral Limited (No 2),[5] Lee J referred to Armstrong Scalisi with approval. His Honour stated:
The class action is different from other forms of litigation where costs payable as between solicitor and client have historically been taxed or assessed against the obvious background that those paying the costs have made a bargain with the professional and, usually, have accepted contractual rates for the work. Speaking very generally, as someone who has seen many reports of cost consultants opining on the reasonableness of fees, there has been no or little examination as to whether tasks could have been completed less expensively if done by junior barristers rather than employees. Perhaps because of the legacy of reasonableness assessments historically occurring in the context of a contractual relationship, the reports rather tend to focus on whether the rates charged by the employees are at a market rate relative to solicitors of a comparable experience. When it comes to assessments of reasonableness of costs in class actions, it seems to me the Court should be giving consideration as to whether work has been allocated between lawyers (be they solicitors or barristers) in an optimal way in the interests of group members.[6]
[5][2021] FCA 350.
[6]Ibid [61].
I note that in Armstrong Scalisi, Rares J was referring to counsel drafting pleadings. He did not refer to discovery. If junior counsel were briefed to conduct the exercise of discovery then it may be able to be done at a rate less than $415 per hour. However in my view the discovery exercise is an appropriate exercise for a legal firm.
Both parties express what is the most appropriate way to conduct the discovery exercise. The defendants are doing work ‘in-house’. Mr Burstyner has provided affidavits of Mr Lees of 5 May 2021 and 21 May 2021 to Law in Order who, he notes, is a leading supplier of document and digital solutions in the legal industry. He has been informed by Law in Order and believes that large discovery preparation projects are increasingly performed often using an “Outsourced Service Team” rather than Australian firms’ in-house solicitors and paralegals. A rate of $1.55 per document is a market standard for review costs by an Outsourced Review Team. Mr Burstyner has calculated a saving of $218,345.57 using this method.
In my view the defendants are entitled to do the discovery process in-house. They would be granted their costs on a taxation costs by the Costs Court. I would not reduce the costs on the basis that discovery could be outsourced.
I have considered the estimate that has been provided and the objections. It is extremely difficult to assess what is an appropriate assessment of costs for discovery in this matter. I note that it is normal that there is a discount applied in an application for security for costs.[7] The defendants submit that a reasonable discount is already built into the estimate claimed by reason of the fact that it is calculated based on the scale rates without any additional allowance for skill, care and responsibility, and that it does not include substantial costs relating to the determination of the scope of the defendants’ discovery.
[7]See Farmitalia Carlo Erba SrL v Delta West Pty Ltd (1994) 28 IPR 336.
An application for security for costs should be assessed on a party/party basis using the appropriate court scales and not on an indemnity basis.
The approach that has been taken by the courts is to identify the items in the draft estimate and, if excessive, reduce them and then apply a further discount.[8] I have been unable to identify items which are clearly excessive, however I do believe that there should be a reduction. I will only make one reduction in the costs estimate and will apply a discount between 25% and 30% using a broad brush approach.
[8]See ACN 096 450 770 (formerly AJH Lawyers Pty Ltd) v Mathieson Nominees [2017] VSC 559.
In my view the amount of $900,000 is appropriate for security.
The Form of Security
The defendants submit that the appropriate form of security is one which is in a liquid form, or that enables funds to be readily accessed with minimum risk that litigation may be required to enforce a security. They say that the security should be in the form of either funds in Court, a deposit to a bank account controlled by each party’s solicitors, or a bank guarantee.
The plaintiffs submit that the protective objectives of an order for security for costs is best achieved by either a provision of an undertaking from the funder LLS or a deed of indemnity from the ATE insurer, Amtrust Europe Limited (‘AmTrust’), plus a cash bond of $20,000 for enforcement of the deed.
In DIF III Global Co-Investment Fund, L.P. v BBLP LLC,[9] Hargrave J set out the principles that are relevant in the exercise of a court’s discretion as to the form of security. His Honour summarised the relevant case law and said:
Drawing these threads together, in exercising its broad discretion as to the form of security for costs in the relevant security circumstances, the Court will usually apply the following principles:
(1)the plaintiff is entitled to propose security in a form least disadvantageous to it;
(2)the plaintiff bears a ‘practical onus’ of establishing that the proposed security is adequate and does not impose an ‘unacceptable disadvantage’ on the defendant;
(3)in order to be adequate, the proposed security must satisfy the protective object of a security for costs order, namely, to provide a fund or asset against which a successful defendant can readily enforce an order for costs against the plaintiff; and
(4)based on these and any other relevant considerations, the Court will determine how justice is best served in the particular circumstances of the case.[10]
[9][2016] VSC 401.
[10]Ibid [40].
In Trailer Trash Franchise Systems Pty Ltd v GM Fascia & Gutter Pty Ltd,[11] the Court of Appeal endorsed those principles and took into account the effect of the Civil Procedure Act 2010 (Vic) (’the CPA’). Tate and Kyrou JJA said:
The authorities do not preclude an order that security for costs be in the form of a personal undertaking by a third party other than a financial institution. However, where the court has a choice between security in that form and security in a liquid form that enables funds to be accessed with minimum risk that litigation may be required to enforce the security, ordinarily the court should prefer the liquid form. The need to prefer the liquid form where a choice is available has become more acute since the commencement of the CPA because:
(a)section 8(1) requires a court to seek to give effect to the overarching purpose in the exercise of any of its powers;
(b)section 7(1) provides that the overarching purpose is ‘to facilitate the just, efficient, timely and cost-effective resolution of the real issues in dispute’;
(c)section 9(1) provides that in making an order in a civil proceeding, a court must further the overarching purpose by having regard to a number of objects, including: the efficient conduct of the business of the court (s 9(1)(c)); the efficient use of judicial resources (s 9(1)(d)); and the timely determination of the civil proceeding (s 9(1)(f)); and
(d)a form of security for costs which does not provide a fund which can be accessed without the cooperation of the opposing party or a person who is connected to that party — and may require the commencement of proceedings to enforce it — has the potential to undermine the overarching purpose. This is because that form of security can give rise to satellite proceedings and additional delay and costs. Such satellite proceedings are contrary to the principle of finality in litigation.[12]
[11][2017] VSCA 293.
[12]Ibid [59].
The audited accounts of LLS as at 30 June 2020 have been produced to the Court by the plaintiffs. The defendants requested further information but have been informed that there are no other accounts and that there has been no material change to the accounts.
The defendants state that what are most relevant is to look at are the cash position of LLS, how it may be affected and whether the Court could be confident that there will be cash in two to three years’ time if the security is called upon.
I note that at 30 June 2020 LLS had cash and cash equivalents of $14,679,752 and as at 30 June 2019 it had $2,790,593. The total operating expenses as at 30 June 2020 were $11,631,996 and as at 30 June 2019 the total operating expenses were $3,742,375. The accounts also show that as at 30 June 2020 there was a profit of $3,092,951, whereas as at 30 June 2019 there was a loss of $1,390,877.
The plaintiffs submit that the proper assessment of the asset position of the fund is not a mere $14,679,752 (the cash on hand and at bank), although that alone would be a substantial undertaking, but rather the proper assessment of the fund is $32,399,599 which takes into account its assets.
I note from the accounts that after liabilities are taken into account the net assets attributable to unitholders are $31,270,947. Part of those assets include litigation contracts in the sum of $9,716,284.
In the notes to the financial statements under the heading “Litigation Contracts” the basis for the valuation of the litigation contracts is referred to. It seems to me that those litigation contracts have been assessed in accordance with proper accounting standards.
In the accounts under the heading “Contingent assets, liabilities and commitments” there is a statement that, “As at 30 June 2020, the total amount invested by the Fund where undertakings to pay adverse costs orders have been provided are $9,716,284 (2019: $2,346,460).”
The defendants submit that no evidence has been put in relation to this matter and the defendants cannot make an informed assessment about this. The plaintiffs state that, short of the reassurance that the work was done in accordance with the accounting standards as reflected in the audited accounts, there is nothing further that can be done. Any evidence would be privileged and the privilege would reside in the people who are not parties to this litigation, namely the funded clients in those other cases.
The notes to the financial statements refer to COVID-19 and state that critical estimates, judgments and assumptions have been determined in an environment of elevated uncertainty. The defendants submit that the COVID-19 pandemic increases the uncertainty of the position and increases the onus of the plaintiffs to demonstrate why its undertaking will be sufficient and whether the Court can have sufficient confidence that there is an asset against which judgment can be readily enforced.
The plaintiffs submit this reference to the COVID-19 pandemic goes no higher than the kind of acknowledgment of the existence of a risk that would be expected to be seen in any company’s financial statements especially having regard to extraordinary events of the last 18 months. The plaintiffs accept that there are uncertainties associated with COVID-19, likewise with Brexit. They say that the test is not a complete absence of risk.
I accept that the COVID-19 pandemic does add an element of risk, but in my view it does not sufficiently affect the issue that is before me. I accept that there can be some risk. I note that if there is a change of circumstances, there is nothing to prevent the defendants from making an application that the form of security be varied.
The defendants submit that any submission that they could come back to court if circumstances change ignores the onus on the plaintiffs to demonstrate that the security proposed will be sufficient at the time it is likely to be called upon. I do not agree. In my view I should be looking at the application as to whether the material before the Court is appropriate for an undertaking to be made that can be exercised in the future. There may be unforeseen matters that occur and, if they do, then the defendants will have the opportunity to apply for a variation of the form of security.
In Roo Roofing Pty Ltd & Anor v Commonwealth of Australia,[13] an application was made by the defendant in a class action for security for costs. The security in that case was offered by a litigation funder. The security offered was insurance against potential liability for adverse costs orders taken out by the funder, proposed undertakings to the defendant and the Court by the funder and the deposit of funds to register any judgment for adverse costs in the Cayman Islands or in the United Kingdom.
[13][2017] VSC 694.
Lansdowne AsJ found that the security offered by the plaintiff was not appropriate. Her Honour said:
The plaintiffs submit that security for costs is not required to be perfect, but only adequate. This is plainly right. Hargrave J held in DIF that in order to be adequate, the proposed security must satisfy the protective object of a security for costs order, namely, to provide a fund or asset against which a successful defendant can readily enforce an order for costs against the plaintiff. Here I do not consider that the proposed security meets that test, by reason of the uncertainty as to the availability of funds held by Harbour III itself in the event of an adverse costs order, and by reason of inconsistency between the proposed security and the overarching purpose of the CPA. The nature and amount of Harbour III’s assets as at the date of an adverse costs order are not certain; if Harbour III is unable or unwilling to meet the order from its own resources and requires a successful claim on the Policy, the defendant cannot ‘readily enforce’ the order; there is a possibility that further security may be required if the current funding of the proceeding ceases; and this will have a major impact on this and other proceedings given the stage already reached in this proceeding.[14]
[14]Ibid [101].
The defendants submit that facts in Roo Roofing are analogous to the situation before the Court here. Roo Roofing was a class action where a funder was involved and an undertaking was being offered. The defendants rely on Roo Roofing and submit that I should follow that decision and not allow security in the form of an undertaking by a funder.
Lansdowne AsJ expressed that her reasons for refusing the undertaking as follows:
In Yara v Oswal, in his observations quoted earlier, Redlich JA held that ‘the degree of likelihood of the respondent being unable to pay the costs’ was a factor to be taken into account in considering the adequacy of proposed security. In DIF, Hargrave J held that there is a ‘practical onus’ on a plaintiff to show that the security it proposes is adequate and does not impose an ‘unacceptable disadvantage’ on the defendant. The funds in the working account are currently, or at least as at 5 September 2017 were, more than sufficient to meet the defendant’s anticipated costs of $1,687,219. Harbour III can also currently call on substantial undrawn capital. Given the size of both its current liquid funds and the undrawn capital it may seem at first blush that the risk that Harbour III will be unable to meet a costs order from its own resources is so slight as to be theoretical. Harbour III is, however, a closed investment vehicle, not an ongoing financial institution, and there is no evidence as to how, and when, the cash at bank or the undrawn capital are to be utilised. Accordingly, there is no assurance that there will be sufficient liquid funds available when required, or indeed any undrawn capital. In these circumstances, I do not consider that the risk of insufficient funds can be said to be insignificant. The defendant is asked by the plaintiffs to bear that risk, to avoid any restriction being imposed on the free use by its litigation funder of its funds. I consider this to be an ‘unacceptable disadvantage’ to the defendant. The plaintiffs have not discharged the practical onus cast on them in relation to payment from Harbour III’s own funds.[15]
[15]Ibid [82].
The plaintiffs submit that the above passage departs from the approach that was adopted by Hargrave J in DIF III. The defendants say that her Honour adopted the position of assuming that if there is any risk at all attaching to either the payment or effectiveness of the security, then that is a reason for rejecting the proposed form of security and reverting to something that is more like a payment of cash in court. The plaintiffs further submit that the question the Court must ask is whether it is a risk of such magnitude, either as to recoverability under the security or risk of unacceptable delay or additional cost or additional inconvenience, that the interests of justice require that the form of security be rejected.
The plaintiffs say that there is risk for any defendant confronted by any plaintiff, and the question is simply whether the risk is so great that the interests of justice require some alternative form of security. In other words, do the proposed arrangements in respect of security put the defendants in as good a position as if they were being sued by a substantial local plaintiff?
The plaintiffs submit that another factor that should be taken into account in determining the form of security is recognition that the funder would incur a very substantial reputational risk if it failed to comply with the undertaking. The funder’s reputation in other proceedings could vanish in terms of its credibility. Presently there would only be a minimal risk that the fund would not be available in the future. The funder is in the business of providing funds for litigation and to fail to honour an undertaking would be a severe dent to its reputation.
In Trailer Trash the Court took into account the consequence that, if the form of security may require the commencement of proceedings to enforce it, then that has the potential to undermine the overarching purpose of the CPA. That is because the form of security could give rise to satellite proceedings and additional delay in costs. The Court of Appeal was of the view that satellite proceedings would be contrary to the principle of finality in litigation.
Here, in my view, after taking into account the cash position and assets of the funder and the risk and reputational damage if the undertaking is not honoured, there will be little risk, or likely no risk, of satellite litigation. It cannot be that the effect of the CPA would be to eliminate undertakings or deeds of indemnities from insurers as forms of security.
Here the plaintiffs have proposed a form of security that is least disadvantageous to it. The plaintiffs have also established the practical onus that the proposed security is adequate and does not impose an unacceptable disadvantage to the defendants. The plaintiffs have provided a fund or asset against which a successful defendant can readily enforce an order for costs against it. They have satisfied the principles raised by Hargrave J in DIF III.
The AmTrust Deed
The plaintiffs submit that if an undertaking by LLS is not acceptable to the Court, then the proper objectives of an order for security for costs are achieved by a deed of indemnity from the well-known insurer AmTrust Europe Limited (‘AmTrust’) together with a cash bond of $20,000 to cover the unlikely event that the enforcement of the deed would require proceedings in the United Kingdom where AmTrust is domiciled.
The annual report and financial statements for the year ended 31 December 2020 have been provided to the Court. The annual report states that:
-as at 31 December 2020 AmTrust had total assets of £1,148,444,000 and as at 31 December 2019 AmTrust had total assets of £1,868,853,000;
-as at 31 December 2020 AmTrust had after tax a loss of £12,513,000 and as at 31 December 2019 after tax it had a loss of £20,237,000;
--in preparation for Brexit, AmTrust transferred its Italian medical malpractice business and other business written in EEA countries to other AmTrust group companies in July 2020. As a result, the business mix of AmTrust in terms of lines of business and geographical exposure has changed through the course of 2020;
-the main external risk currently facing AmTrust is COVID-19. AmTrust has taken steps to alter or reduce normal business activity to help control the spread of the outbreak. Some of the steps involved include:
-the implementation of business continuity plans;
-increased communication and coordination with AmTrust’s stakeholders and shared service partners; and
-increased monitoring of debtor collection periods to ensure AmTrust maintains adequate cash to honour its commitment to policyholders, employees and vendors.
An independent auditor’s report has also been produced to the Court. That report contains statements that:
-gross claims outstanding including valuation of incurred but non-reported reserves as at 31 December 2020 were £389,618,000 and as at 31 December 2019 were
£911,908,000 (a decrease of £522,290,000);-the auditors found the valuation of incurred but not reported reserves to be acceptable;
-the risks that were considered most likely to adversely affect AmTrust’s available financial resources were:
-adverse insurance reserves development, potentially caused by the impacts of the COVID-19 pandemic; and
-a deterioration in the valuation of AmTrust’s investments arising from a significant change in the economic environment;
and;
-the directors’ use of the going concern basis of accounting in the preparation of the financial statements is appropriate. The auditor has not identified, and concurs with the directors’ assessment that there is not, a material uncertainty related to events or conditions that, individually or collectively, may cast significant doubt on AmTrust’s ability to continue as a going concern for the going concern period.
The defendants submit that based on the annual report and accounts that there is some risk that AmTrust may not be able to honour the payment of costs if and when it becomes due in two to three years’ time. It relies on the fact that the assets have diminished over time, the company has suffered losses and the impacts of Brexit and COVID-19.
In my view there are always risks, but here AmTrust has done everything it can to eliminate risks that spring from events such as Brexit and COVID-19. There are ample assets held by AmTrust which in three years’ time should cover an order for security for costs in the sum of $900,000.
As at 11 September 2020 AmTrust had a credit rating of A- (excellent) from AM Best, which is a global credit rating agency with a specialised focus on the worldwide insurance industry. Mr Lees deposes that AM Best credit ratings are available without charge from AM Best’s website. That website explains that AM Best’s credit rating services are services provided to, and apparently paid for by, the insurer or other company the subject of the rating, who can then leverage that rating for business opportunities. As a relative measure of risk he notes that, regarding AM Best’s credit ratings, on 3 July 2019 S&P Global reported that AM Best had downgraded trading of AmTrust Europe from A to A- and downgraded its long term issuer credit rating of AmTrust Financial Services Inc from “bbb” to “bbb-“.
Mr Lees also deposes that in a high profile example, on 17 June 2008, AM Best downgraded its financial strength rating of American International Group from “A++” to “A+”. Three months later, AM Best published a report noting that American International Group had received an emergency $85 billion loan from the Federal Reserve Bank of New York “in an effort to stabilise the global insurance giant”, leaving the US federal government in control of four-fifths of the equity of American International Group.
Based on the affidavit of Mr Lees the defendants submit that even a rating of A- does not mean that there will not be a risk. They also submit that the rating of A- can change very quickly as evidenced by the example Mr Lees gives.
I accept that change can occur quickly in the finance industry. However, the A- rating is an excellent rating. The fact that there are instances of other companies with high ratings becoming insolvent should have no bearing on the ability of AmTrust to meet the obligations under the deed of indemnity. The accounts demonstrate an ability to pay an adverse costs order.
The defendants submit that another element of risk is the risk of delay in satellite litigation. They say that if AmTrust does not cooperate, they will require the defendants to take additional steps to get a judgment and then have it recognised and enforced in England. These are risks to be avoided, as raised in Trailer Trash. They also submit that the deed contemplates litigation in a foreign jurisdiction, which leads to an additional complexity. Questions are raised as to what happens to the $20,000 paid into Court and how it will be utilised.
The deed of indemnity provides that if AmTrust fails to pay any amount and is therefore liable to pay in accordance with an adverse costs order, then it unconditionally and irrevocably undertakes to:
-consent to judgment being entered against it in favour of the defendants;
-consent to the Australian judgment being registered in the High Court of Justice of England and Wales under Foreign Judgments (Reciprocal Enforcement) Act 1933 (UK);
-not seek to set aside the registration of the Australian judgment in the High Court; and
-not seek security for costs against the defendants for proceedings for the registration or enforcement of the Australian judgment in the United Kingdom.
In my view the enforcement provisions of the deed of indemnity narrow the scope of problems AmTrust could create. The deed effectively binds AmTrust, locks it in, and narrows the scope for it to create problems or resist enforcement.
I also note that Mr Burstyner has deposed that he is informed by Mr Simon Warr, Lead Underwriter of AmTrust, and believes that:
-since 2010 AmTrust has been providing policies globally, but predominantly in the United Kingdom, that protect against adverse costs orders comparable to that offered in this proceeding;
-since 2010 AmTrust has issued approximately 800 policies and it continues to issue between 50 and 100 policies annually with the average sum insured being equivalent to $1.373 million;
-AmTrust has been providing such policies in Australia since 2012 and in that period has issued approximately 250 to 300 policies in Australia;
-all of the policies (in and outside Australia) written by AmTrust on which calls have been made have been honoured. There has never been any default and no enforcement steps have ever been required as against AmTrust; and
-the total amount paid by AmTrust Europe for all claims made on these policies is many times the approximate $1.2 million amount the defendants seek to secure.
In DIF III Hargrave J allowed as security a deed of indemnity to be given by AmTrust with a payment into Court of, or a bank guarantee for, $20,000 per defendant group to cover the costs of registration of a foreign judgment in the United Kingdom in “the unlikely event that enforcement of the AmTrust indemnity was required”. His Honour required the provision of AmTrust to include a satisfactory term of the indemnity that it would not seek security for costs in any enforcement proceedings in the United Kingdom.
The defendants submit that I should not follow DIF III and they seek to distinguish that case as follows:
-that case did not involve a class action and there was no funder;
-at the time the application was made the company made profits and its assets were greater than they are now;
-the amount of security sought was only $250,000;
-the economic environment was different as there was neither COVID-19 nor Brexit on the horizon;
-the plaintiffs in that case were foreign entities and the defendant entered into commercial dealings with those foreign entities; and
-Hargrave J did not address the implications of the CPA.
In my view none of those factors are such that DIF III should be distinguished. Hargrave J set out the appropriate principles to be applied which were endorsed by the Court of Appeal.
The defendants rely on Queensland authorities in support of its submissions that security by way of deed of indemnity from AmTrust is not sufficient. In Adeva Home Solutions Pty Ltd v Queensland Motorways Management Pty Ltd,[16] Applegarth J refused to allow a plaintiff to provide a deed of indemnity from AmTrust as security. His Honour was concerned with the form of the deed that was being offered. The parties before him were unable to agree to the terms of the deed of indemnity that AmTrust would be asked to execute. His Honour considered the question in the absence of any evidence before him as to the comparative costs of the different forms of security. That is not a matter that was dealt with by Hargrave J in DIF III, nor is it matter that is to be taken into account in determining the fullness of security. The only question that needs to be asked is whether the security is adequate.
[16][2020] QSC 361.
I also note that his Honour did not refer to cases referred to by Hargrave J, such as Maxim’s Caterers Limited v Magnona Pty Ltd (No 1),[17] where Jagot J stated:
In other words, this is a case where, on the available evidence and other than to the extent of the costs of enforcement of a costs order in Hong Kong, the fact that Maxim’s is ordinarily resident outside Australia does not place Magnona at any greater risk in terms of its capacity to enforce a costs order than would be the case if Maxim’s were ordinarily resident inside Australia. In this case, accordingly, the weight which foreign residency and lack of assets within Australia would ordinarily attract is largely, if not wholly, offset by the evidence that enforcement of any costs order in favour of Magnona will be able to be enforced in Hong Kong against Maxim’s substantial assets in that jurisdiction with relative ease pursuant to procedures which are well defined and known. Using the words of McHugh J this is a case where, on the evidence, Maxim’s “can point to other circumstances which overcome the weight of the circumstance that that person is resident out of and has no assets within the jurisdiction” (P S Chellaram & Co at 323).[18]
[17][2010] FCA 450.
[18]Ibid [13].
No reference was also made to Berry v Innovia Security Pty Ltd,[19] in which Buchanan J held that there were adequate reliable assets held by the plaintiff in the United Kingdom to satisfy a costs order. His Honour stated:
The position adopted, in this Court at least, therefore seems to be as follows. A foreign applicant with no assets in Australia should normally expect to provide some security for costs if requested to do so. The amount of the security which is appropriate will depend on all the circumstances. A foreign applicant bears a practical onus of showing that the party seeking security will not be unreasonably disadvantaged if a costs order is made against the foreign applicant. It will be relevant, in that regard, that there are arrangements for the enforcement of Australian judgments in the jurisdiction of the foreign applicant and that, in that jurisdiction, the foreign applicant has adequate assets to satisfy a costs order in the proceedings. It may be relevant that the foreign applicant has given an undertaking not to seek security for costs in its own jurisdiction if enforcement of an Australian costs order is sought.
In the present case there are reciprocal arrangements for the enforcement of judgments. The first applicant has undertaken not to seek security for costs, if a costs order against him is sought to be enforced in the United Kingdom.[20]
[19][2014] FCA 357.
[20]Ibid [34]-[35].
It is clear from those cases that the objective for an order for security is to put the local defendant in the same position as if the overseas funder was in fact a local plaintiff with local assets.
The second Queensland case relied on by the defendants is Equititrust Ltd v Tucker,[21] where Bond J also did not permit an indemnity from AmTrust as security. His Honour stated that if one form of security is under consideration then the sole question is whether the form of security to use is adequate to protect the defendants. If there is more than one form of security to be considered, then the focus should be on the adequacy of the options to protect the defendants. His Honour was concerned by the approach taken by the plaintiff in that case. He found it troubling that AmTrust could initially give instructions to the plaintiff that the deed was non-variable as a basis for the contention that security should be provided in that form, and then the plaintiff could happily engage with variation of the deed without troubling to explain why the approach changed.
[21][2020] QSC 269.
I am bound to follow DIF III unless it can be distinguished or shown that it is plainly wrong. In my view it cannot be distinguished and it is not plainly wrong. An adequate form of security would be a deed of indemnity from AmTrust.
Conclusion
The plaintiffs’ preferred option for security for costs is an undertaking from LLS. In my view that is an acceptable form of security provided that LLS pays into Court $20,000 for the purposes of enforcement.
SCHEDULE OF PARTIES
| S ECI 2020 02588 | |
| BETWEEN: | |
| LYNDEN IDDLES | Plaintiff |
| GEOFFREY IDDLES | Plaintiff |
| - v - | |
| FONTERRA AUSTRALIA PTY LTD (ACN 006 483 665) | First Defendant |
| FONTERRA MILK AUSTRALIA PTY LTD (ACN 114 326 448) | Second Defendant |
| FONTERRA BRANDS (AUSTRALIA) PTY LTD (ACN 095 181 669) | Third Defendant |
0
6
0