The National Australia Bank recently obtained an order for security for costs against the plaintiffs in a class action suit against NAB. The plaintiffs described the application as “extraordinary in size and unprecedented in Australian history”. However it was not so much the size of the security for costs order, but the principles found in favour of NAB that makes this a very useful guide, and a warning to funders of class actions.
In 2009, Maurice Blackburn issued various media announcements that it proposed to issue a class action against NAB on behalf of various shareholders, who had acquired NAB shares between 1 January and 24 July 2008. It was alleged that NAB had failed to disclose its exposure to a portfolio of collateralised debt obligations. The plaintiffs were funded by a commercial litigation funder. NAB retained the firm of Freehills in Sydney to undertake work in preparation of the claim.
The plaintiffs agreed that NAB was entitled to security for costs. The argument was primarily over the quantum. NAB’s application sought approximately $13.4mil in security. The three main arguments against the quantum were:
whether NAB was entitled to approximately $1.6mil in pre-commencement costs
whether the costs of interstate (NSW) solicitors could be sought, and
the method of calculating the costs, and the evidence relied upon to support the calculation.
Justice Davies of the Victorian Supreme Court found that the latest that NAB was put on notice of the possible class action was a press release by Maurice Blackburn in June 2009. NAB and Freehills then swung into action, and the fact that it then took the plaintiffs some 18 months after the initial announcements to commence the proceedings could not be the fault of NAB.
The Court held that that legal costs incurred for work undertaken in reasonable anticipation of litigation (in principle) are allowable, as long as those costs are “necessary and proper.”
His Honour did reduce the pre-commencement costs only to take into account the uncertainty whether all those costs would be recoverable on a party/party basis at a final costs assessment .
Costs of interstate solicitors
The same reasons impacted upon the findings of the costs incurred by Freehills in their Sydney office. Some 12 months passed between Maurice Blackburn’s press releases, and their notification to Freehills that the proceedings would be conducted in Victoria – again, a delay the Court laid at the feet of the plaintiffs.
Moreover, the Court found that NAB had retained Freehills in Sydney on some of the largest litigation in which the bank had been involved for 15-20 years, and that relationship was “relevant to the Court’s consideration of the reasonableness of NAB engaging Sydney solicitors at the outset" .
Secondly, the 18-month delay in initiating the proceedings after the announcements meant that it would not have been improper or unreasonable for NAB to continue to engage Freehills Sydney, rather than Freehills Melbourne.
The calculation method - insufficiency of evidence
NAB sought its security based upon six broad categories:
ongoing work with counsel
preparation for final hearing.
The plaintiffs’ main criticism with the calculation of the quantum was that there was insufficient evidence before the court for it to fix an appropriate amount of security for costs, and hence the amount should be heavily discounted. The plaintiffs recognised that the Court does not have to examine individual items to the extent of minute examination, however the plaintiffs’ submitted, via their expert cost consultant witnesses, that there was still insufficient information upon which they could reach a conclusion on a certain quantum.
To complicate things, NAB’s costs expert did not have access to Freehills’ file, (apparently so as not to waive NAB’s legal privilege over those documents). She had been instructed to base her calculations upon the specific assumptions and cost estimates made by the Freehills partner in his affidavit. NAB’s expert relied upon the “Ausmaq” methodology used by the costs experts in Idoport Pty Ltd v National Australia Bank Ltd , which importantly was not challenged by the plaintiffs’ experts.
The Court held, however, that its task was not to fix a “gross sum amount”, but to fix an amount by way of security that is “sufficient" . The amount is not to be determined with any mathematical precision , nor was a precise estimate required . The Court found NAB’s expert’s evidence was the “best evidence” on the application, and that it was not “insufficient information” just because the expert did not have access to Freehills’ files.
NAB’s estimate of its own solicitor/client costs of the proceedings had been calculated at $20,325,590.
Whilst the Court found that the hourly rates, the 50% “complexity” loading, and the number of lawyers used by NAB were reasonable, the uncertainties of the litigation and the calculations made by NAB’s expert resulted in a significant discount being applied to the security amount.
The plaintiffs generally submitted that the amount claimed by NAB was excessive. Davies J. noted that the amount claimed represented only some 2% of the $450million claimed by the plaintiffs in the proceedings. His Honour felt that the “more compelling criticism of the quantum … is the uncertainty about the preciseness of that estimate…”.
The Court also applied a “substantial discount” to the quantum due to the probability that the matter will be referred to mediation, and hence the “possibility of settlement at an earlier point in time than just prior to trial”.
But that will just mean that, if the matter does not settle at mediation, NAB will obviously approach the Court again to extend the security for costs amount.
As to how the Court reached its discounts below is also not explained in this judgment. NAB had applied a 15% “settlement pre-trial” discount, and admitted that this figure was entirely arbitrary.
The amounts awarded
Of the $1,627,442 sought by NAB for its pre-commencement costs, the Court awarded $325,000 (20% of the claim). It then discounted the costs claimed to date since the commencement of the proceedings by 20% to $3,933,046. Lastly, the Court discounted the estimate of the future likely costs by a whopping 50%, down to $1,954,916. The total: $6,212,962 – just a touch under 50% of the total sought by NAB in the application. Sure, it’s a big amount, but it could have easily been much higher if the substantial discounts had been less.
when seeking security for costs, the costs incurred prior to the commencement of proceedings can be sought, as long as they have been incurred “in reasonable anticipation of litigation.” Therefore, as a plaintiff, don’t wait too long between threatening proceedings and actually commencing them
it is not necessary for the costs to be calculated with mathematical certainty, or even with direct reference to the lawyer’s file, but there is certain methodology that should be followed and supported by clear estimates and assumptions
Courts will heavily discount security for cost estimates to take into account the likelihood that parties will settle at mediation. The larger the matter, the more likely the matter will go to mediation. This is relevant in the face of most courts’ ability to refer parties to mediation, and the relatively new Federal Civil Dispute Resolution Act 2011.
1 Pathway Investments Pty Ltd and Ors v National Australia Bank Limited  VSC 97 (21 March 2012)
2 at 
3 at 
4  NSWSC 23
5 citing section 1335 Corporations Act 2001
6 Idoport ibid at 
7 at 
8 at 
9 at