Show me the money part II: Federal Court confirms funders who play an active role in litigation are exposed to a direct order for adverse costs

In another welcome decision for class action defendants, the Federal Court has confirmed that litigation funders are not shielded from direct costs order liability by the existence of private indemnity arrangements with the funded party.  

In our previous article “SHOW ME THE MONEY”, we examined a decision of the Supreme Court of Queensland in Murphy Operator Pty Ltd & Ors v Gladstone Ports Corporation Limited, where Justice Crow reaffirmed the established principles governing security for costs and, importantly, said that security for costs does not cap a defendant’s right to pursue a litigation funder for the full amount of any costs order exceeding the security provided. In this article, we explore another avenue by which a litigation funder can be directly exposed to costs orders in litigation and the benefits this provides for defendants to funded litigation.  

A direct costs order provides an avenue for a successful defendant to pursue recovery from the funder itself, rather than relying on the applicants to call upon and enforce their indemnity rights which could otherwise require further litigation or enforcement steps.[1]

The decision, which emphasises that an order for costs is a valuable, enforceable right, suggests that seeking a costs order directly against the unsuccessful party’s funder may be an effective strategy for a successful defendant to streamline enforcement, reduce procedural complexity and delay, and ultimately give greater certainty of recovering its costs.  

The benefits of a direct costs order against the funder

On 20 June 2025, the Honourable Justice Shariff delivered judgment in Davis v Wilson (Costs) [2025] FCA 666 ordering that both the unsuccessful applicants and their litigation funder, LCM Operations Pty Ltd (LCM), be jointly and severally liable for the second and third respondents’ costs.  

Central to his Honour’s decision in this case was the “high degree of control” LCM exercised over the conduct of the litigation, including decisions about which lawyers were retained, the experts engaged and how to proceed or resolve the claim.[2] The Court referred to lead authority Knight v FP Special Assets Ltd[3] in addition to Section 43 of the Federal Court of Australia Act 1976 confirming that the funder’s control of and commercial interest in the litigation are sufficient to justify a costs order directly against it.[4]

In opposing the proposed order, LCM submitted that:

1. a direct costs order of this kind was unnecessary because it had already agreed to indemnify the applicants against adverse costs orders in their funding agreement; and
2. an undertaking provided by correspondence to the respondents was sufficient.

The Court rejected these arguments, holding that the circumstances did not render a direct order against LCM unnecessary or futile,[5] and that LCM’s submission to the contrary “[blurred] the distinction between, on the one hand, the imposition of a liability for costs, and, on the other, whether that liability will be satisfied”.[6]

His Honour reasoned that the making of a costs order establishes a debt in favour of the successful party, providing them with a tangible, direct right of enforcement to which the respondents were entitled. Ultimately, his Honour concluded that a successful party is better off having the benefit of a right to enforce a debt against both the unsuccessful party and their funder than without it, because it provides a greater deal of confidence and certainty in long running and complex litigation and avoids the need for enforcement action.

Limited appetite for “issue-based” costs

A separate question arose as to the apportionment of the cost liability. The applicants sought an issue-based apportionment of costs:

1. on the basis that the respondents should be liable for the applicants’ costs incurred for “issues” the applicants has been successful in establishing, including those which led to a finding that the second and third respondents each contravened s 1041H of the Corporations Act and that the third respondent additionally contravened s 12DA of the ASIC Act;[7]
2. in relation to their costs incurred for preparation for evidence of witnesses who were not called, or alternatively, the applicants submitted that they should be ordered to pay only 50% of the respondents’ costs on a party-party basis having regard to their partial success.[8]

The respondents sought their costs of the whole proceeding on the ordinary basis as the overall successful party.[9] 

His Honour confirmed that the Court has power to make issues-based costs orders, but noted that the fact the Court does not accept all arguments of a successful party does not in itself make it an appropriate approach to take.[10] In rejecting the applicants’ submissions entirely, Justice Shariff was clear that his findings in respect of the contraventions to which the applicants referred were not an acceptance of the applicants’ case, and that treating issues as if they were discrete and severable was “fraught with difficulty” and ignored the complexity of litigation.[11] His Honour then confirmed that the mere failure to call a witness does not disentitle that party to the costs tethered to that evidence.[12]

Justice Shariff declined to apportion costs in the manner sought by the applicants and explained that the relevant “event” for the purposes of costs is the overall outcome of the proceedings, which in this case the respondents were successful in achieving. His Honour also outlined that the applicants’ partial success on individual issues was not a necessary or helpful consideration. Generally, where issues are closely interwoven, as his Honour said was the case here, the Court is reluctant to apportion costs by issue.[13] Unless the issues are truly discrete and severable, costs will generally follow the overall result.

Key takeaway from Davis

Defendants should continually consider the involvement of funders in litigation and, where appropriate, seek direct costs orders against funders to avoid the inevitable delays with expensive and protracted enforcement of security for cost deeds and associated ATE policies.