October 2012
The recent decision of the Court of Appeal in Contractors Bonding Ltd v
Waterhouse has brought some clarity to the issues surrounding the court’s
role in supervising third-party litigation funding.
Third-party commercial funding for litigation is a recent
phenomenon in the New Zealand legal scene, with a number of
firms setting up in this country to offer funding for the whole
range of expenses associated with bringing legal claims.
A key issue is the court’s role in supervising funding arrangements
and the extent to which the funding agreement needs to be
disclosed to the defendant. Defendants have a legitimate
interest in the plaintiff’s funding arrangements, so that they can
manage exposure to unmeritorious claims and ensure that the
plaintiff and its funders are subject to the important incentives
created by costs consequences. Strategically minded defendants
are also interested in knowing about the plaintiffs’ funding
arrangements, so as to be able to undermine them and potentially
defeat even meritorious claims through satellite litigation.
A recent decision of the Court of Appeal has brought some
clarity to this area. An earlier decision of that Court, involving a
representative action on behalf of 1,800 Feltex shareholders,
had left open questions about the extent of the court’s role in
overseeing litigation funding where group litigation is not
involved. Now, in Contractors Bonding Ltd v Waterhouse [2012]
NZCA 399, the Court of Appeal has confirmed that the court has
a function in overseeing third-party funding in all types of
proceedings, and has articulated some general requirements
about disclosure of funding agreements.
This FYI explores the concept of litigation funding, the nature of
the court’s oversight role, and the level of detail required to be
disclosed about a funding arrangement. It also looks at some
issues still to be resolved.
What is litigation funding?
In general terms, litigation funding involves a third-party
commercial funder paying the cost of litigation for a plaintiff
in exchange for an agreed portion of any judgment or
settlement received if the plaintiff’s claim succeeds. Typically,
the funding covers not only the party’s own legal fees and
disbursements, but adverse costs awards and the need to pay
security for costs to the defendant. If the plaintiff is unsuccessful,
the funder recovers nothing.
Litigation funding has been slow to take off in New Zealand
compared to other jurisdictions but has become increasingly
common, in large part due to the Global Financial Crisis and the
failure of numerous New Zealand finance companies and other
corporations. The failures have left behind a trail of disappointed
investors for whom, without litigation funding, legal action
might otherwise not be attractive or financially possible. The
courts have been prepared to endorse third-party funding
because of its role in providing access to justice:
In an age where the costs of litigation are beyond the means of
many people, professional funders undoubtedly have an
increasingly important role to play in ensuring that legal obligations
and rights are enforced and vindicated.1
Haven’t litigation funders always been around?
Until relatively recently, the courts frowned upon litigation
funding as a commercial enterprise. The torts of maintenance
and champerty, developed by the English courts around 300
1 Houghton v Saunders (2008) 19 PRNZ 173 (HC) at [177]
years ago, prevented parties becoming involved in litigation
that was of no direct concern to them in order to protect the
integrity of the court process.
Although maintenance and champerty have now been
abolished by legislation in England & Wales and Australia, no
such statute has been passed here and the New Zealand Law
Commission has recommended retaining the torts.
Judicial support and oversight of litigation funding
Notwithstanding that maintenance and champerty continue
to be a part of our system of law, judicial support for litigation
funding has occurred at a high level. In the 2009 Court of
Appeal decision in Saunders v Houghton [2010] 3 NZLR 331,
shareholders of Feltex Carpets brought proceedings against
the directors, promoters and other signatories to Feltex’s
prospectus and investment statements. The claim was a
representative action - that is, the plaintiff sued on behalf of
other parties with the same interest in the plaintiff’s claim.
This decision indicated that litigation funding is unlikely to be
condemned as unlawful maintenance and champerty where:
a. The court is satisfied that there is an arguable case for rights
that warrant vindicating.
b.There is no abuse of process. This involves looking at the
funder’s degree of control over the litigation, the level of
profit it stands to gain and the nature of its interest in
the litigation.
c. The funding proposal is approved by the court.
Because the claim in the Feltex case was a representative
action, the High Court Rules had necessitated an application
for court approval of its representative character at the outset
of the proceeding. The issues about the funding arrangement
arose in the context of this procedural step. What was left
unclear as a result of the decision was whether the Court of
Appeal’s comments were of general application, or only arose
in the context of litigation funding for group claims.
Saunders revisited - Contractors Bonding
In Contractors Bonding, the Court of Appeal addressed the
issue left open by its decision in Saunders. The Court held that
it did have a function in assessing third-party funding
arrangements in all cases, notwithstanding the absence of any
specific rule in the High Court Rules requiring such
arrangements to be put before the court. Because third-party
funding arrangements, both in ordinary claims and in
representative actions, are on their face champertous, this
warrants an assessment in each case of whether the
arrangements are in fact lawful.
a. Giving formal notice to the court and the non-funded party
that a litigation funder is involved. This notice should be
given at the time proceedings are commenced or otherwise
when a litigation funder first becomes involved.
b. Providing the non-funded party with the following key details
of the funding agreement:
i. the identity and location of the funder;
ii. the funder’s financial standing and ability to fund the case
through to trial;
iii.the funder’s amenability to the jurisdiction of the
New Zealand courts; and
iv.the terms on which funding can be withdrawn and the
consequences of withdrawal.
In practice, this may involve providing the non-funded party
with a copy of the funding agreement, though the decision
contemplates redactions of information which could confer a
tactical advantage to the non-funded party, such as information
about the size of the ‘war chest’ or other commercially
sensitive or privileged details. The Court noted that the
practice in the Australian Federal Court is for funded parties to
redact such information from disclosure copies of their
funding agreements.
Early disclosure of funding agreements is already a routine
feature of Australian representative actions. In fact, as the
Court of Appeal noted, some Australian commercial funders
choose to publicly disclose their funding agreements on their
websites, including their usual commission rates, and will
provide sample agreements upon request.
Issues still to be resolved
While Contractors Bonding brings some welcome clarity to
the area, New Zealand’s common law relating to litigation
funding is still in its infancy. Two headline issues still to be
canvassed thoroughly concern the extent to which it is
appropriate for funders to exercise control over the conduct
of the litigation and the appropriate level of profit for the
funder if the claim is successful.
Regulation of some form is in the pipeline, in the form of the
draft Class Actions Bill and High Court Rules. Progress has
however been slow. Drafts prepared in 2008 are currently
sitting with the Ministry of Justice. Moreover, the draft Bill and
the draft Rules only relate to litigation funding in the context
of class actions, which will lead to exactly the same sort of
uncertainty that Contractors Bonding needed to resolve
following the Feltex decision. Overall the subject calls for
comprehensive regulation, rather than piecemeal
development through the courts, but at the moment it’s a
matter of watching this space.
Assessment of a funding arrangement must necessarily
involve disclosure of some elements of the funding agreement.
The Court held that this will involve the funded party:
T. 09 977 5090 M. 021 987 058 E. [email protected]
T. 09 977 5187 M. 021 582 673
E. [email protected]
T. 09 977 5031 M. 021 403 592 E. [email protected]
T. 09 977 5074 M. 021 960 493 E. [email protected]
T. 09 977 5125 M. 021 497 713
E. [email protected]
T. 09 977 5076 M. 021 935 415
E. [email protected]
T. 09 977 5013 M. 029 977 5013 E. [email protected]
T. 09 977 5297 M. 021 505 581 E. [email protected]
T. 04 924 3540 M. 029 924 3540 E. [email protected]
T. 04 924 3525 M. 021 720 920 E. [email protected]
T. 09 977 5207 M. 021 538 847
E. [email protected]
T. 09 977 5088 M. 021 273 6241 E. [email protected]
This newsletter is produced by Simpson Grierson. It is intended to provide general information in summary form. The contents do not constitute legal advice and should not be relied on as such.
Specialist legal advice should be sought in particular matters. © Copyright Simpson Grierson 2012.