Another decision on adverse costs orders in employment class actions: should you expect a 'chilling effect' on employment class action risk?

'In the interests of justice' 8 min read

Duck v Airservices Australia (No 3) is the latest in a series of cases that have grappled with the intersection of employment class actions, litigation funders and the traditionally 'no costs' jurisdiction of the Fair Work Act.

We examine the decision and its potential impacts on employment class action risk.

Key takeaways

• Section 570 of the Fair Work Act 2009 (Cth) (FWA) precludes cost orders against a party to the proceeding (unless specific circumstances apply). Duck v Airservices Australia (No 3) confirms that s570 does not prevent the court from making a non-party costs order against a litigation funder in a funded employment class action. The court noted this may have a 'chilling effect' on employment class actions.
• However, the court concluded that s570 changes the landscape for considering adverse costs orders in employment class actions. The usual rule that 'costs follow the event' does not apply. That is, the rule that a successful party is entitled to recover its costs.
• Instead, when exercising its discretion to award costs against a non-party funder, the court will consider the underlying purpose of s570 alongside broader principles, including access to justice and procedural fairness.
• Here, the court declined to make a costs order against the funder. While the court's comments make it clear that will not always be the case, they also suggest that the discretion to award costs against a funder may be exercised more cautiously in FWA class actions.

What was the case about?

Ms Duck was the lead applicant in an employment class action. She alleged contraventions of the FWA. A common question, which was decisive to the case, was raised and heard separately. It was decided adversely to Ms Duck and the class members, so the proceeding was dismissed and a full trial was avoided.

The respondent applied for an order that Ms Duck's litigation funder, Augusta Ventures Limited (AVL), pay its costs. AVL also made submissions on the costs issue as a 'person affected' by the application.

A bit of background

Justice Bromwich delayed his decision until the Full Court handed down its decision in Augusta Ventures Limited v Mt Arthur Coal Pty Ltd (2020) 384 ALR 340 — see our thoughts on Mt Arthur Coal here.

Ultimately, his Honour confined the application of Mt Arthur Coal to security for costs under the FWA in the context of employment class actions.¹ However, he considered parts of the Full Court's reasoning helped with certain underlying issues, especially as to the proper understanding of the effect of s570.²

The detail of the decision

Justice Bromwich said it was 'common ground' that the court cannot ordinarily make a costs order under s43 of the Federal Court of Australia Act 1976 (Cth) against Ms Duck because of the prohibition in s570 of the FWA.³ He also noted that none of the exceptions to the prohibition in s570(2) applied — eg that the proceeding had been instituted vexatiously.

Consistently with Mt Arthur Coal, his Honour concluded that s570 does not prevent the court from making a non-party costs order, as the provision only applies to a party to proceedings.⁴ Rather, it is one of many factors to consider in the exercise of the court's discretion to award costs. That is, it is a relevant — but not determinative — consideration in deciding whether, in a given case, it is in the interests of justice that a costs order be made against a non-party funder.

The parties' key submissions on costs were, essentially:

• for the respondent: s570 does not prevent costs being awarded against a non-party litigation funder and does not otherwise assist the funder, which took on the litigation for purely commercial gain. So, the 'usual rule' that costs follow the event should be applied. The respondent submitted that it was in the interests of justice for the usual rule to apply in this case;⁵ and
• for Ms Duck and her litigation funder: that the 'usual rule' that costs follow the event does not apply to costs orders against non-parties and that costs orders against non-parties should be made only sparingly.⁶

Justice Bromwich decided that:

the effect of s570 casts serious doubt on the utility of approaching the question of costs against a non-party litigation funder in terms of any general rule. The better approach is to consider that s570 at least sufficiently changes the costs landscape to deny there being any starting point in favour of, or against, costs being awarded against funders in Fair Work Act class action cases. However, this must be considered through the prism of the interests of justice, and, when appropriate, protecting the legitimate interests of a successful respondent…⁷

In the circumstances, Justice Bromwich held that it was not in the interests of justice to make a costs order against Ms Duck's litigation funder.⁸ In doing so, his Honour considered both the underlying policy of s570 and other factors relevant to the court's discretionary power.

Justice Bromwich stated that he 'reluctantly concluded' that had the case gone to trial and failed (rather than being determined as a consequence of the separate question), the respondent's arguments on costs would have been more likely to prevail.⁹

Interestingly, his Honour noted his concern with such an outcome:

I consider that such an outcome bears with it practical consequences for the efficacy of s570 in large volume, small claim, class action cases involving difficult issues where success is far from assured. In my view this is likely to have a chilling effect on the bringing of such cases, undermining the objective of s570 at a practical level.¹⁰

The relevance of s570 — cost risks and access to justice

Justice Bromwich considered two arguments put forward by the litigation funder as to why s570 is relevant to the exercise of the court's discretion to award costs against litigation funders in FWA proceedings. They raise important policy considerations as to how the generally 'no costs' regime of the FWA intersects with the class action landscape:

• Cost risk - the funder submitted that the usual reason for permitting costs orders against litigation funders is that they should not be permitted to have the benefit of costs orders in their favour without being exposed to adverse costs. In an FWA class action, s570 means the funder is not able to recover its costs against the respondent (who, as a party to the proceeding, has the protection of s570). The respondent submitted that a funder who sought to gain from litigation should share in the cost of it if it fails. His Honour cautioned against accepting that broad proposition too 'readily or universally' in employment class actions.¹¹ His Honour noted that, given the difficulty in funding claims, litigation funders have a role to play in access to justice — and too readily allowing costs against them may 'have the effect of indirectly subverting the purpose of s570…'.¹² His Honour commented that as 'a practical matter, a non-party funder may in certain circumstances be the only way in which the underlying purpose of s570 is not rendered a hollow legal protection divorced from reality'.¹³ That said, he stated that s570 does not give non-party funders 'free reign to conduct themselves with impunity'.¹⁴ His Honour suggested that the court may decline to award costs against a funder in the absence of circumstances akin to those in s570(2), so as to maintain 'coherence and consistency in this area of litigation'.¹⁵
• Access to justice - the corollary of the above is that, while a non-party funder is usually acting for its own commercial purposes, arguably it is facilitating access to justice by removing financial barriers that may be faced by applicants seeking to bring an action.¹⁶

Application to the circumstances of the case

Bearing in mind the underlying policy of s570, Justice Bromwich decided it was not in the interests of justice to order costs against the litigation funder in this case given:

• 'the cooperative and sensible way in which the litigation was conducted', especially by way of the separate question. His Honour considered it 'very much in the interests of justice to encourage this sort of conduct';¹⁷
• that it was not suggested or identified that the proceeding was instituted vexatiously or without reasonable cause, or that there was any conduct that amounted to any unreasonable act or omission;¹⁸ and
• that, despite the respondent not having made any application for security for costs or otherwise having provided notice that it intended to seek a non-party costs order, he was not satisfied that any denial of procedural fairness had been established. His Honour said the plain words of s570 of the FWA mean the litigation funder should have been on notice that the provision did not provide a shield from a costs order in the way it does to an individual applicant.¹⁹

Implications

• It is helpful to have a further decision that makes it clear that s570 of the FWA does not prevent a court from exercising its discretion to award costs against a third party litigation funder in an FWA class action.
• The court declined to exercise that discretion in this case, but more concerning are the broader comments made by Justice Bromwich about how the court might approach the exercise of its costs discretion in FWA cases. Those comments may indicate that, while s570 does not directly apply to a litigation funder, the court will be guided in its exercise of its discretion by the broad policy underpinning s570 and may be less inclined to award costs against a funder in an FWA class action.
• While Justice Bromwich was concerned that the potential for a court to award costs against a litigation funder in FWA class actions may have a 'chilling effect' on those claims being brought, his Honour's comments in this case may do quite the opposite.
• We will be watching with interest to see how other courts approach the exercise of their costs discretion in FWA class actions.