It is increasingly common for insurers to be faced with the prospect of defending legal proceedings, which are commenced by an insolvent plaintiff, but are financed by litigation funders. The advent of litigation funding presents legal and strategic challenges for insurers that wish to obtain security for any adverse cost order that might be made in a proceeding against the plaintiff.  A recent decision of the Supreme Court of Queensland has positive implications for defendants seeking security for costs in proceedings which are financed by litigation funders.

Gainspace, a developer, entered in two contracts with Suncare to construct 35 townhouses in Mackay. As the project approached completion, the parties fell into dispute and Gainspace ultimately terminated the contracts. Suncare then commenced proceedings against Gainspace claiming damages arising from Gainspace’s wrongful termination of the contract, while Gainspace brought a counterclaim based on breach of contract and restitution.

Suncare subsequently fell into liquidation, and its liquidators entered into a litigation funding agreement with Echo Living Pty Ltd (Echo) in which Echo agreed to indemnify the liquidators and Suncare in respect of any adverse costs orders made in the proceeding.  This indemnity was offered in exchange for a share in any fruits of the litigation.  Suncare sought to rely on this indemnity as satisfactory security in the event of an adverse costs order in the proceedings.  Gainspace considered this indemnity to be inadequate security and applied to the Court seeking orders for security for costs on the basis that Suncare would be unable to meet an adverse costs order in the proceedings.

The decision
There is a longstanding controversy about whether there is a legal principle that an application for security for costs should be dismissed, if those who stand to benefit from the insolvent plaintiff’s success offer to be personally liable for the plaintiff’s costs.

In contrast to the approach preferred in other jurisdictions, the Court found that no such principle exists, although the existence of a litigation funding agreement is a discretionary matter to be taken into account. The Court held that where a commercial litigation funder that shares in the proceeds but not in the risk of an adverse costs order, there is a powerful factor in favour of making an order for security for costs.

Accordingly, the Court granted Gainspace’s application for security for costs on the basis that the litigation funding agreement was capable of being terminated by Echo at any time and, as such, was not satisfactory security.

Implications for insurers?
The decision in Suncare is a positive one for insurers as it demonstrates that a litigation funding agreement does not automatically protect an insolvent or impecunious plaintiff from being ordered to pay security for costs.

Suncare is a reminder to insurers and defendants to carefully scrutinise the terms of any third party indemnity offered as security for costs to ensure that it is irrevocable.  Insurers should nonetheless, think carefully before applying for security for costs as the court will consider the plaintiff’s prospects of success when deciding the application and may make comments regarding the strength or otherwise of the defence of the claim.  Such comments at an interlocutory level, may adversely impact the insurer’s ability to strategically resolve the underlying dispute.