NSW Supreme Court Denies Security for Costs Over Litigation Funding Agreement

The court denied the defendant's request for security for costs, finding that disclosing the full litigation funding agreement would confer a tactical advantage on the defendant. The decision was based on the principle that certain clauses within the agreement contained commercially sensitive information and legal professional privilege.

Supreme Court New South Wales

Medium Neutral Citation: [COMPANY] v [NAME] (No 4) [2024] NSWSC 657 Hearing dates: 28 May 2024 Date of orders: 28 May 2024 Decision date: 29 May 2024 Jurisdiction: Equity - Commercial List Before: Stevenson J Decision: Unredacted copies of litigation funding agreement not to be provided to defendant Catchwords: COSTS – security for costs – relevant factors – whether ordering security would stultify proceedings – belated production of litigation funding agreement with private lenders – agreement produced with redactions – whether unredacted copy should be made available to defendant EVIDENCE – privileges – legal professional privilege – where litigation funding agreement in non-representative proceedings – whether details of manner in which lenders might share in claim proceeds should be disclosed to defendant – whether clauses were subject to legal professional privilege – whether clauses contained commercially sensitive information – whether disclosure would confer tactical advantage on defendant – relevance of provision in Practice Note SC Gen 17 concerning redaction of funding agreements to conceal information that might confer tactical advantage on defendant Cases Cited: Coffs Harbour City Council v [NAME] Group Limited (t/as ANZ Investment Bank) [2016] FCA 306 Texts Cited: Practice Note SC Gen 17 Category: Procedural rulings Parties: [COMPANY] (Plaintiff/Respondent) [NAME] trading as Port Authority of New South Wales (Defendant/Applicant) Representation: Counsel: [redacted] [NAME]-[NAME] SC / [NAME] (Defendant/Applicant)

Solicitors: [redacted] [NAME] (Defendant/Applicant) File Number(s): 2022/101288

JUDGMENT 1. The plaintiff, [COMPANY] ("[NAME]"), alleges that the defendant, [NAME] trading as Port Authority of New South Wales ("Port Authority"), engaged in unconscionable conduct in relation to the proposed development and use of a Multi-User Facility to be located at Glebe Island in Sydney. 2. [NAME] Authority entered an Agreement for Lease in December 2018 pursuant to which Port Authority was to construct a Multi-User Facility at Glebe Island, and [NAME] was to have the exclusive use of a portion of that facility for the bulk importation and despatch of sand.

3. In March 2019, Port Authority terminated the Agreement for Lease on the grounds that [NAME] had failed to satisfy certain conditions precedent that, [NAME] contends, Port Authority was aware [NAME] could not meet when introduced into the Agreement for Lease. 4. [NAME] alleges that Port Authority thereby engaged in unconscionable conduct and claims reliance damages of more than $4 million and loss of profits of some $297 million from 2019 for a period of up to 20 years.

5. The proceedings have reached a stage where [NAME] has served its lay and expert evidence in chief and Port Authority has served some of its lay evidence.

6. I am part-heard in relation to Port Authority's application, made by Notice of Motion filed on 12 March 2024, that [NAME] provide security for Port Authority's costs up to the conclusion of its evidence in the sum of some $950,000. 7. [NAME] has already provided $363,000 security for earlier stages in the proceedings. [1] 8. [NAME] accepts that it will be unable to pay Port Authority's costs of defending the claim if it were ordered to do so. [NAME] has not been an operating company since the termination of the Agreement for Lease by Port Authority. [NAME] will remain a dormant operating company. It has no assets. Its sole purpose is to prosecute these proceedings.

9. Argument on Port Authority's application proceeded before me on 20 May 2024.

10. Two of the issues argued that day were whether, as [NAME] contended, an order for further security in the amount sought by Port Authority would stultify the proceedings, and whether, as Port Authority submitted, the proceedings were likely to be stultified in any event by reason of [NAME]'s inability to finance its own costs of the proceedings.

11. In that regard, [NAME]'s solicitor, [NAME], deposed on 21 March 2024: "At present, [NAME] is seeking to raise further funds to meet its current and future fees and disbursements expected to be incurred in prosecuting these proceedings. I am informed by [NAME] ([NAME]'s Chief Financial Officer) and believe that he expects to raise $1.5 million from [NAME]. About $1 million of those funds will be used to meet [NAME]'s currently outstanding costs and disbursements."

1. During the hearing before me on 20 May 2024, that evidence remained unqualified until I had this exchange with [NAME] SC, who appeared with [NAME] for [NAME]: "HIS HONOUR: --I have to ask myself the question, now that it's been raised, the question is how is this plaintiff going to continue to fund its own costs, let alone those of the defendant, but for possibly raising private funds, as [NAME] sets outs in paragraph 83? Anyway, we'll take a short break while you ponder that. Say 20 minutes? SHORT ADJOURNMENT HIS HONOUR: Yes, [NAME]. [NAME]: Thank you, your Honour. Your Honour, during the adjournment I received instructions in relation to the issue about the $1.5 million that your Honour and I were discussing before the break. I was in fact informed of this during my discourse with your Honour, but I didn't hear my junior, so I put it to one side, not thinking it was terribly relevant. But in fact it is relevant. The $1.5 million has been secured, and we will want an opportunity to put before your Honour some evidence in relation to that. The reason why it wasn't put on earlier was for the reason I indicated earlier that we didn't understand that my friend was putting a position that the proceedings would be stifled anyway because the plaintiff could not pay its own costs. Had that been put before us by way of an affidavit or a submission before today, we would have put that evidence on."

1. Several days later, [NAME] made a further affidavit exhibiting redacted copies of two documents dated 9 February 2024: 1. "Litigation Funding Deed" made between [NAME] and [COMPANY] ("[NAME]"), a 36.1% shareholder in [NAME] and a company associated with one of its directors, [NAME]; and 2. "Loan Deed" made between [NAME] and six "Initial Lenders".

1. By the Litigation Funding Deed, [NAME] agreed to "advance to [NAME] funds required for [NAME]'s litigation costs".

2. By the Loan Deed, the six "Initial Lenders" agreed to advance to [NAME] $950,000 to enable [NAME] to fulfil its obligations under the Litigation Funding Deed. The Loan Deed also provided for "Additional Lenders" to execute an "Accession Deed" to become "lenders" under the Loan Deed. The documents revealed that on 10 April 2024, a further individual had executed such an Accession Deed and agreed to advance a further $500,000 to [NAME] to enable it to fulfil its obligations under the Litigation Funding Deed. 3. [NAME] referred to the Initial Lenders and the Additional Lender as, together, the "[NAME]".

4. Those documents revealed, for the first time on this application, that, as at 21 March 2024, [NAME] was not only "seeking to raise further funds" but appeared to have secured funding.

5. These are matters which appear to be directly relevant to [NAME]'s stultification argument. On 28 March 2024, I made a direction that [NAME] and an officer of [NAME] provide an affidavit explaining why these matters were not disclosed prior to the hearing on 20 May 2024.

The redactions 1. I invited written submissions from [NAME] concerning the basis for the redactions and received written submissions from [NAME]. 2. [NAME] foreshadowed that [NAME] would provide the Court with an unredacted copy of the documents "so that the Court can rule on the redactions that have been made". 3. I received an unredacted copy of the documents.

The redactions to cl 4.1 of the Litigation Funding Deed and cl 5.1 of the Loan Deed 1. Clause 4.1 of the Litigation Funding Deed and cl 5.1 of the Loan Deed have been redacted on the basis that they contained legal advice received by [NAME] from its lawyers in relation to the proceedings.

2. Each clause is headed "The Litigation" and provides that "the parties acknowledge that", with the balance of the clauses redacted.

3. Having seen the unredacted wording of those clauses, I am satisfied that they set out legal advice obtained by [NAME] in relation to the proceedings and are subject to legal professional privilege.

The redactions to cl 6 of the Litigation Funding Deed and cl 7 and Sch 3 to the Loan Deed 1. Clause 6 of the Litigation Funding Deed is headed "Claim Proceeds" and provides that "[NAME] and [NAME] will divide the claim proceeds between them as follows", with par 6(a), (b), (c), and (d) redacted. Clause 7 of the Loan Deed is also headed "Claim Proceeds". The entirety of subcll 7.1, 7.2, 7.3, and 7.4 is redacted. Schedule 3 of the Loan Deed is entitled "Claims Proceeds Worksheet" and is entirely redacted.

2. These provisions have been redacted on the basis that it is said that they contain commercially sensitive information that should remain confidential.

3. There is no dispute about the general nature of the contents of these paragraphs. Thus, [NAME] submitted that they: "… include information about the manner in which any amounts received by [NAME] from Port Authority in connection with the proceedings are to be distributed to [NAME] and the [NAME]. The specified percentages of the distribution of the claim proceeds that [NAME] and the [NAME] may be entitled to in particular contingencies are indicated." 1. [NAME] later submitted that "it is not in issue that the [NAME] stand to gain a share of the claim proceeds in these proceedings". 2. [NAME] drew attention to Practice Note SC Gen 17, which deals with Representative Proceedings, and in particular, cl 7.2 of that Practice Note, which provides: "At or prior to the initial case conference each party will be expected to disclose any agreement by which a litigation funder is to pay or contribute to the costs of the proceedings, any security for costs or any adverse costs order. Any funding agreement disclosed may be redacted to conceal information which might reasonably be expected to confer a tactical advantage on the other party."

1. These proceedings are not representative proceedings. However, I think [NAME] was correct to submit that where, as here, "litigation funding agreements are disclosed in non-representative proceedings … the same principles in respect of their potential redaction should apply".

2. In that regard, [NAME] submitted: "Revealing this information to Port Authority may give it a tactical advantage in the substantive proceedings. That is because Port Authority would gain, and be in a position to exploit, the position by structuring settlement offers to take advantage of the differences between the positions of [NAME] and the [NAME]. [NAME] and the [NAME]' interests may not all coincide when any particular offer might be made. Put another way, if Port Authority became aware of the manner in which the claim proceeds were to be distributed, including the particular thresholds at which the claim proceeds were distributed to [NAME] and the [NAME], Port Authority may structure any settlement offer having regard to those thresholds."

1. In Coffs Harbour City Council v [NAME] Group Limited (t/as ANZ Investment Bank), [2] Rares J held that a redaction of similar clauses to those in cll 6 and 7 of the Litigation Funding Deed and the Loan Deed should be made because of the potential "tactical advantage" conferred on the defendant arising from their disclosure. [3]

2. Having seen the redacted passages, I can see the force of [NAME]'s submission. It may be, as [NAME] SC, who appeared with [NAME] for Port Authority, submitted, that there are provisions in the Litigation Funding Deed and in the Loan Deed that will ensure there is no potential for any conflict of interest between [NAME] and the [NAME]. However, knowledge of the "particular thresholds at which the claim proceeds [would be] distributed to [NAME] and the [NAME]", might well prompt Port Authority to "structure any settlement offers having regard to those thresholds". [4]

3. In any event, now that [NAME] has, belatedly, disclosed the existence and nature of the Litigation Funding Deed and the Loan Deed, and has accepted that they are "litigation funding agreements", I am not able to see "why Port Authority requires further detail about the particular share of the claim proceeds that [NAME] and the [NAME] will receive". [5]

Conclusion as to redactions 1. It is for these reasons that, on 28 May 2024, I declined to order that [NAME] provide Port Authority with unredacted copies of the documents in question.

**********

Endnotes 1. $100,000 was paid on 6 July 2022; $178,000 on 6 January 2023; and $85,000 on 26 September 2023. 2. [2016] FCA 306.

3. At [27], [31].

4. To adopt [NAME]'s language.

5. Again, adopting [NAME]'s language. DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 29 May 2024