How are costs apportioned in multi-party proceedings (Part 3)?

This week’s issue of Bite Sized Legal Insights considers costs in class actions. You might ask – what does that have to do with the way costs are apportioned in multi-party proceedings? The answer can be found in the recent decision of Watson & Co Superannuation v Dixon Advisory and Superannuation Services (Settlement Approval) [2024] FCA 386 (Watson for short).

What is Watson About?

Watson is about the costs of class actions where there has been a carriage contest. A carriage contest is multi-party interlocutory proceeding in which the court decides which of two or more class actions about the same thing get to go ahead. The class actions which do not proceed are permanently stayed, and the funders/ firms who commenced them do not remain in the litigation.

In Watson, the party that won the carriage contest and the respondents ultimately reached a settlement. Nevertheless, two costs-centric issues remained for Justice Thawley’s determination:

1????Settlement approval

2????If and to what extent Balance Legal Capital II UK Ltd (Balance) could recover costs incurred before it’s proceeding was stayed in the carriage contest Kosen-Rufu Pty Ltd v Dixon Advisory and Superannuation Services Ltd [2022] FCA 573 (Kosen-Rufu)

Context is everything…

Although carriage contests are multi-party proceedings, the courts don’t treat them in the same way as the kinds of proceedings discussed in Part 1 and Part 2. Justice Thawley considered Balance’s application for costs in the context that:

• Courts have significant oversight over solicitor-client costs in class actions. If a class action settles, the plaintiff firm’s legal costs are often paid out of the settlement sum before the residual is distributed to group members (see for example Watson [13]). However, the court must approve the settlement (see s33V(1) of the Federal Court Act 1976). In deciding whether to do so, the court must consider whether the legal costs to be deducted from the settlement sum are fair and reasonable in all the circumstances (see the principles outlined at Watson [17]-[18])
• Carriage contests do not involve the same parties as the primary proceeding and do not finally determine any rights or obligations as between the parties. Balance was not involved in Watson. However, it could apply for some of its costs under s33V(2) because it had previously been granted liberty to do so; ?Watson [8] and Kosen-Rufu [48]

Balance’s costs…

Balance did not seek its costs of the carriage contest per se. Balance was sought an assortment of costs including:

• The costs of establishing a managed investment scheme as part of the architecture behind the Kosen-Rufu proceeding (MIS costs)
• The costs of applying to intervene in an ASIC proceeding that preceded the class action, including the costs of a report valuing group members’ claims (ASIC proceeding costs)
• The costs of re-registering Kosen-Rufu Pty Ltd and providing indemnity advice to the lead applicants (re-registration costs)
• Pre carriage contest costs, including the costs of preparing the pleading and reviewing initial discovery in the Kosen-Rufu proceeding (pre-Proceedings costs)

Section 33V(2) grants a broad judicial discretion to make whatever order the court considers ‘just’ concerning the distribution of a settlement sum. Justice Thawley identified the following considerations as relevant to whether it is just to order costs in favour of a litigation funder who lost the carriage contest (Watson [190]-[191]):

• Whether the funder incurred the costs to benefit group members
• Whether the steps taken by the funder had an enduring benefit for group members
• Whether allowing the costs would cause group members to pay twice for substantially the same work
• That funders are businesses that sponsor competing proceedings in pursuit of commercial gain and can reasonably expect not to recover all of their business expenses

Justice Thawley:

• did not allow the MIS costs because the MIS was established as a vehicle for Balance to recover costs if it’s proceeding continued. It would be unjust for group members to bear the MIS costs because they were incurred in the course of Balance’s business and did not ultimately benefit group members (Watson [199])
• did allow the ASIC proceeding costs ($126,797.55) for two reasons. First, if the ASIC proceeding had not been stayed, Balance’s application to intervene seeking an order for the penalty sum to be made available to compensate group members might have succeeded. This would have ultimately benefitted group members (Watson [205]). Second, the applicant in the Watson proceeding did not take any steps to value group members claims and ultimately relied on a report obtained by Balance in support of its application to intervene (Watson [196] and [206])
• did not allow the re-registration costs because they were duplicative and did not have a lasting benefit for group members (Watson [208])
• did not allow the other pre-proceedings costs of reviewing initial discovery and preparing pleadings (et cetera). Justice Thawley inferred from the material available that at the time Balance incurred these costs, Shine had already performed or would perform the same work. Allowing Balance to recover these costs would cause group members to pay for the same work twice without any lasting benefit (Watson [210]-[212])

What are the key takeaways?

Justice Thawley’s decision provides some guidance on what little (if any) costs can be recovered by a funder that loses a carriage contest. Before applying for costs under s33V(2), they should consider:

• whether they have been granted liberty to apply for costs in the other proceedings
• whether any steps taken were substantively different from those taken by the plaintiff firm in the other proceeding
• whether any steps taken had a lasting benefit for group members
• the costs of obtaining an expert report regarding their costs, including whether steps taken were duplicative (see Watson [210])

Justice Thawley’s approach may not be the final word on the issue. Several factors may enable subsequent cases to be distinguished from Watson, including:

• Balance only tendered expert evidence as to whether it’s costs were fair and reasonable. It did not tender expert evidence on the issue of whether it’s costs were duplicative or had any enduring benefit for group members
• the respondents were cash strapped. Proceeding to trial would have eroded the respondents’ ability to satisfy any judgment debt, and the settlement left little spoils to be divided between the funder’s legal costs, administration costs, and group members
• there were only two parties in Kosen-Rufu. Many carriage contests involve substantially more numerous parties. If all of them brought Watson style applications, it could significantly diminish the return to group members
• Balance involved a court approved settlement. Where a matter proceeds to judgment, the issue of costs is usually determined separately after judgment has been delivered. In this case, the judgment debt and party-party costs would flow from separate asynchronous orders rather than being drawn from the same well (the settlement sum)