Security for costs: part 2
15th Feb 2018
Read the first article of the series here.
DID THE ATE POLICY IN THIS CASE OFFER ADEQUATE SECURITY?
Before undertaking a consideration of the respondents' specific objections, Yates J looked at the applicable legislation relating to the court's power to make an order for security: s56 of the Federal Court of Australia Act 1976 (Cth), r19.01(1) of the Federal Court Rules 2011 (Cth) and s1335(1) of the Corporations Act 2001 (Cth).
Justice Yates observed that whereas s56 of the Federal Court Act provides the court with unconditional power and discretion to order that security be provided by an applicant, s1335(1) of the Corporations Act was conditioned on the requirement that for security to be ordered there needed to be evidence at the outset that the corporation would be unable to pay the costs of the defendant if the corporation was unsuccessful in its claim. Therefore, s1335(1) included a threshold requirement before security could be ordered.
His Honour stated that in his view there was no reason why an appropriately worded ATE policy might not be an acceptable form of security and, furthermore, it might also be capable of negating the threshold requirement contained in s1335(1) of the Corporations Act.
In this case Vannin had accepted that security should be provided and consequently, Yates J did not need to embark on a consideration of whether the threshold contained in s1335(1) was met. In any event, these two distinct questions, which Yates J referred to as 'convergent questions', ultimately come down to an analysis of the second issue: whether the form of security proposed was sufficient in the circumstances.
Justice Yates considered several UK cases which accepted an ATE policy as an adequate form of security, and noted the position of the courts in those cases which rejected certain concerns raised by the respondents in this case.
For example, as to the argument that a breach by the insured of a term of the policy could mean that the insurer was able to limit or even cancel the policy, it was held in a case of Geophysical Services Centre Co v Dowell Schlumberger (ME) Inc  EWHC 147 [TCC] that this was only a theoretical possibility and the risk was, on the same basis, merely a theoretical possibility.
As stated by Yates J: 'The point here is 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.'
However ultimately, Yates J was not persuaded to accept the AmTrust policy that had been secured by Vannin in this case as adequate security for the respondents' costs. In reaching this conclusion, Yates J was persuaded by the following factors:
- The insured under the policy was Petersen, not the respondents, and while Petersen (and Mr and Mrs Petersen) had given undertakings to the court that they would make claims on the policy, those undertakings did not include undertakings to sue AmTrust to enforce any claim if AmTrust failed to respond positively to any claim, and evidence as to Petersen's financial circumstances suggested that it would not have the financial resources to sue AmTrust in any event.
- The undertakings provided were undertakings to the court rather than to the respondents, so the respondents had no direct contractual rights against the Petersen parties and while the recent enactment of the Civil Liability (Third Party Claims Against Insurers) Act 2017 (NSW) meant that the respondents might be able to bring a claim directly against AmTrust, the exercise of this right was subject to certain restrictions.
- The potential consequences of non-disclosure (including non-fraudulent non-disclosure) included an ability on the part of AmTrust to reduce its liability or even cancel the policy, and there was inadequate evidence as to the circumstances under which the funder had obtained the policy (Vannin had not given any evidence on the issue).
- The AmTrust policy contained a significant number of exclusions, and while Petersen argued that, in line with the UK position, the associated risk was merely theoretical, the concept of risk 'reflects a value judgment' that is likely to differ across different parties.
The respondents had illustrated this by way of the argument that the cost of providing a deed of indemnity at $550,000 indicated that the insurer considered the risk it was exposed to under the policy to be significantly less than the risk it would be exposed to if it provided an unconditional deed of indemnity in favour of the respondents.
Even if it were to be accepted that the risk of certain exclusions was theoretical, some exclusions had an associated risk that was much more real, such as a clause in the policy which allowed AmTrust to exclude liability for any costs caused by the negligence of Petersen's legal representatives.
In this case, the respondents asserted that they were likely to make arguments at trial criticising the way Petersen's case had been conceptualised and pleaded and, if they did so, that might cause AmTrust to rely on this exclusion on the basis that it supported negligence on the part of Petersen's legal representatives.
The risk of cancellation before a costs order was made would mean that there would be no indemnity available under the policy for any costs incurred prior to the cancellation.
There was a risk that if Petersen became insolvent, any proceeds received under the AmTrust policy may not be made available to the respondents.
The clause in the policy which required Petersen to resist any application for summary assessment of the respondents' costs conflicted with the Petersen parties' overarching obligation to the Court to act in a way so as to facilitate the just resolution of disputes according to law.
Justice Yates clearly stated that, in appropriate circumstances, an ATE policy could satisfy as security for a respondent's costs, and that it may even suffice to refute the usual presumption in favour of security being ordered.
However, the reasons articulated by his Honour as going against the respondents in this case appear to contain some 'deal breakers', and would be difficult for a respondent to overcome in any similar application in the future, unless the insurance policy differed substantially in its terms and conditions from that obtained by Vannin in this case.
While this is a developing area of law, the factors that weighed against a finding in Petersen's favour suggest that it may be some time before an Australian court is prepared to accept an ATE policy as providing adequate security for a respondent's costs. It is likely to require a change from the mindset that such policies contain restrictions and limitations that render them inherently risky compared with one that adopts a less cautious approach.
For now, it appears that parties seeking to rely on insurance policies when confronted with a security for costs application should consider the alternative of offering to provide a deed of indemnity to the other party, or potentially, offering security by way of an assignment of the benefit of the policy to the respondent.
Kim May is Senior Litigation Manager at Litigation Lending, Sydney.
This is the second article in a series of two. Her first article introduced the case discussed here, Petersen Superannuation Fund Pty Ltd v Bank of Queensland Limited  FCA 699, and the overarching concerns it raised.
A version of this article first appeared in the December 2017 edition of the Australian Restructuring Insolvency and Turnaround Association Journal, 34-6.
The views and opinions expressed in these articles are the authors' and do not necessarily represent the views and opinions of the Australian Lawyers Alliance (ALA).