Will a successful defendant in a class action be awarded its costs? Don’t bank on it

If a defendant company successfully defends a class action, they will be awarded their legal costs, right?  Well, not necessarily.  A recent class action decision from the Federal Court illustrates how costs are at the discretion of the Court and may not always “follow the event”.

Legal costs usually “follow the event”.  This means that if a defendant successfully defends a claim, the Court will order the unsuccessful plaintiff to pay the costs of the defendant so far as those costs are reasonably incurred.  However, this position is not absolute.  For example, the Court may not order the plaintiff to pay costs incurred by the defendant in raising defences which were unsuccessful, particularly if those defences had little merit.  Even if all of the defences of the defendant are successful, it may still not be awarded its costs.  This is what happened in Turner v MyBudget Pty Ltd (No 2) (MyBudget).

The MyBudget  class action

MyBudget was a class action brought by Kelvin Turner on behalf of customers of MyBudget.  MyBudget assisted people in financial difficulties to manage their financial affairs.  MyBudget entered into an agreement with Mr Turner pursuant to which his income was deposited into an account operated by MyBudget and out of which MyBudget would transfer Mr Turner a weekly amount for his living expenses.  One of the terms of the agreement was that MyBudget would not pay Mr Turner any interest earned on the account but would instead use that interest to pay bank fees incurred by MyBudget.  By the same token, Mr Turner was not required to pay any bank fees.  These bank fees would be absorbed by MyBudget.  Mr Turner challenged the entitlement of MyBudget to retain interest earned on the account.  Mr Turner’s claim was wholly dismissed by Justice Lee of the Federal Court.

MyBudget sought its costs of the proceeding on a “party and party” basis up to 10 April 2018 and thereafter on an “indemnity basis”.  Without going into detail, costs on an “indemnity basis” would be more generous to MyBudget than on a “party and party” basis.  MyBudget sought costs on an “indemnity basis” because it made a settlement offer in March 2018 that each party walk away bearing its own costs and MyBudget ultimately did better than this offer.

Why the successful defendant didn't get its costs

Even though MyBudget was wholly successful in defending the claim and had made a settlement offer which it bettered, Justice Lee ordered that each party bear its own costs.  In other words, Mr Turner was not required to pay MyBudget anything.

Justice Lee noted that “[a]lthough the fact that MyBudget has been successful in resisting the claim by Mr Turner is a very powerful discretionary factor militating in favour of an award of costs, it is not necessarily determinative.”  Further, the rule that costs “follow the event” is not “absolute” and “somewhat of an oversimplification”.

Justice Lee made the following points in reaching the conclusion that the parties should bear their own costs.

• Although Mr Turner’s arguments were unsuccessful, they “were far from being unarguable and … were advanced in an efficient and comprehensive manner”.
• Mr Turner’s claim was not purely brought in the public interest since he sought compensation for himself.If it had been brought purely in the public interest, there would have been a stronger basis for the parties bearing their own costs.Still, Mr Turner’s claim was for a “very modest” amount and by pressing it to judgment, MyBudget and 24,222 of its customers obtained certainty about how a contractual clause regarding the handling of interest by MyBudget operated.Many of these 24,222 customers were “likely to have some financial vulnerability”.For these reasons, Mr Turner’s claim had “a very significant benefit transcending the parties”.
• The “genesis of this dispute was a clause which even MyBudget accepted at the hearing was not drafted adroitly”.
• The settlement offer made by MyBudget did not change matters because it was reasonable for Mr Turner to reject it.On this point, Justice Lee noted that had he been asked to approve a settlement according to the terms of the offer (as is required by section 33V of the Federal Court of Australia Act), he “very much doubt[ed]” he would have because the settlement would not have been fair and reasonable.

What the MyBudget decision means for future class action defendants

There are two important features of the MyBudget class action that might distinguish it from many other commercial class actions.  First, Mr Turner was represented by a community legal centre and second, his claim (and those of group members) were not financed by a litigation funder.  This is in contrast to most class actions where group members are represented by a large commercial law firm and their claims are financed by a litigation funder which will receive a significant proportion of any amount recovered by group members.  Justice Lee was clearly aware of this.  His Honour noted that Mr Turner’s claim was “a world away from a commercial class action, where the applicant is part of some form of common enterprise which seeks to use the Court’s processes not only for the vindication of the applicant’s personal claim but also as a means by which a managed investment scheme is seeking to derive a significant financial advantage for the participants in the scheme including a litigation funder.”  For this reason, the costs orders in MyBudget are perhaps unlikely to be replicated in a typical commercial class action.

Nonetheless MyBudget is a reminder to all defendants in class actions (and even defendants not in class actions) that they can’t be assured they will be awarded their legal costs if they ultimately succeed at trial.  Costs are at the discretion of the Court and always depend on the particular circumstances of the case.  This is something defendants and their legal advisers should bear in mind when considering whether to settle a proceeding, particularly one which is likely to involve significant legal costs.