A win to litigation funders in employment class actions

Clarifying liability for costs in Fair Work Act class actions 6 min read

Recent data shows an upward trend in employment class action filings.

This uptick means courts are being asked to grapple with important questions about how conventional class action procedure and practice interacts with the Fair Work Act 2009 (Cth) (FW Act). One question that goes to the heart of the commercial viability of employment class actions for litigation funders is the extent to which funders can be liable for costs in FW Act proceedings. Last week, the Full Federal Court had its say on this issue.

We examine the decision and its potential impact on the recent trend of increased employment class action filings.

Key takeaways

• In class action proceedings, the lead applicant is generally exposed to the risk of an adverse costs order in the proceeding. Where a class action is funded, it is common practice for the funder to indemnify the lead applicant for any adverse costs order. However, section 570 of the FW Act precludes (with limited exceptions) costs orders being made against a party in FW Act cases.
• The court confirmed that s570 of the FW Act does not apply to non-parties, including litigation funders. They can be required to pay costs for a proceeding under the FW Act, including a class action.
• The court also has the power to require a litigation funder in a FW Act proceeding to provide security for costs. However, given the consequence of a failure to provide security is generally to stay or dismiss the applicant's proceeding, security should only be granted where there are circumstances related to the applicant themselves (rather than the funder) that justify that course.
• This decision may embolden funders to finance more employment class actions. However, any encouragement litigation funders receive from the court's decision not to grant security for costs is likely to be offset by the court's confirmation that litigation funders can be required to pay the costs of a class action under the FW Act that ultimately fails.

The case

The lead applicant has two group proceedings (class actions) on foot under Part IVA of the Federal Court of Australia Act 1976 (Cth) (the FCA Act).¹ Essentially, the proceedings can be described as employee 'wage underpayment' class actions.

The lead applicant and group members claim they were underpaid wages and entitlements by their employer (the owner and operator of a coal mine) by being wrongly characterised as casual employees when they were in fact full time permanent employees.

The respondents in the proceedings are the owner and operator of the coal mine and the labour hire company that provided the labour force for the mine.

The applicant's claims rely on recent decisions of the Full Court of the Federal Court of Australia that have dealt with similar issues, particularly the 'WorkPac decisions'.² Read more about our thoughts on those decisions here and here.

Augusta Ventures Limited (AVL) is an English-domiciled litigation funder providing financial support for the two group proceedings.

A unique feature of employment class actions is s570 of the FW Act. Section 570 operates as a qualification to the court's powers with respect to costs. Instead of the usual rule that costs follow the event (that is, a successful party has a reasonable expectation of being awarded costs against the unsuccessful party), s570 provides that parties in proceedings in relation to matters arising under the FW Act, such as a breach of general protections, are not, in the absence of some unsatisfactory conduct, to be required to pay the costs of another party.³ For this reason, the FW Act is sometimes referred to as a 'no costs' jurisdiction.

Primary judgment — orders that AVL provide security for costs

The respondents sought orders that AVL provide security for their costs of the group proceedings, and that, if AVL did not provide the security, then the group proceedings be stayed or dismissed.

AVL argued that the court did not have the power to order security for costs against it, or, if the court had that power, it was discretionary and should not be exercised in this case. Justice Lee rejected this argument, holding that the court did have power to order AVL to provide security for costs.⁴ His Honour considered several factors relevant to the discretion to award security. The crucial consideration was the commercial funding by AVL. Justice Lee held that there was no textual or contextual argument that suggests that the protection from costs under s570 of the FW Act should be extended to non-party funders who have a commercial interest in the proceeding, and that the fact that the matter was within a 'no costs' jurisdiction was not a powerful reason to decline an award for security against the funder if it was otherwise appropriate.⁵

His Honour ordered AVL to provide security by serving Deeds of Indemnity executed by its insurers totalling $3.1 million (and other ancillary orders). AVL appealed.

Appeal granted — proper characterisation of security for costs

The Full Court granted the appeal.⁶ Chief Justice Allsop delivered the leading judgment (with which Justices Middleton and White generally agreed). His Honour's reasoning focused on the consequences of an order for security for costs as threatening the continuation of the applicant's claim.

Importantly, Chief Justice Allsop commented that s570 of the FW Act does not apply to third party litigation funders. So, funders may be required to pay costs if an employment class action is ultimately unsuccessful. Further, his Honour held that the court has the discretion to order security for costs against a litigation funder. However, his Honour was not prepared to exercise that discretion in this case.

Chief Justice Allsop held that the central consideration in the court's exercise of its discretion was not the commercial motivations of the litigation funder being ordered to provide the security, but the potential consequences to the applicant if the funder failed to provide the security ordered.

The consequences of a failure to provide security for costs is ordinarily (as was the case here) that the applicant's claim be stayed or dismissed. As such, Chief Justice Allsop considered that, in a FW Act proceeding where the applicant personally cannot be liable for any adverse costs order, it will ordinarily not be appropriate for the court to threaten the applicant's claim with a stay or dismissal unless the litigation funder provides security for any adverse costs order that may be made against it.

Effectively, the court considered that there was no conduct on the applicant's part that warranted him being subjected to an order of the court that, if it was not complied with, could impose conditions on or put an end to his claim.

Implications

This decision may be a win for class action promoters, but only in part. It sets a strong precedent in relation to security for costs in employment class actions and shifts the risk profile in favour of class action promoters. That may embolden funders to investigate and finance more FW Act class action proceedings. Indeed, we have already seen public comments made by at least one plaintiff law firm active in this space suggesting that this decision will likely result in more class actions being commenced, including smaller 'underpayment' claims.

However, the decision does not give funders a bulletproof shield from costs exposure in employment class actions. In particular, the case confirms that litigation funders can be required to pay costs of an unsuccessful employment class action claim. Further, the case leaves open the possibility that there may be circumstances in which a security for costs order may also be warranted - although we suspect that such circumstances will be hard to come by.

There is presently a judgment pending in another FW Act proceeding⁷ regarding an application for costs against a funder. We will continue to monitor developments in that proceeding closely. In the meantime, FW Act class actions are likely to remain an attractive prospect for class action promoters, even if they are not an entirely ‘no costs’ proposition.