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31 January 2017
The funding of litigation in New Zealand by third parties on commercial terms has gathered momentum in recent years. This has particularly been the case with representative and class actions, with four such litigation funding arrangements approved by the courts in the past four years. At least eight providers currently offer litigation funding services in New Zealand.
Litigation funding involves a funder paying the legal fees of one or more parties to litigation in which the funder has no other interest beyond the benefit of the funding terms. In exchange, the funder receives a return on any judgment, award or settlement. Usually, the return is contingent on the success of the case, entitling the funder to a percentage of the proceeds. Funding arrangements are usually on a non-recourse basis, so that the legal fees advanced are only repayable to the funder from the proceeds when the case succeeds.
Despite the increasing number of funding arrangements, no comprehensive set of rules and principles governing their application has yet emerged. There has been no legislative provision and, to date, the higher courts in New Zealand have been reluctant to set down rules of general application.
Until recently, common law courts were of the view that, in the absence of legislative intervention, funding of litigation for profit was an abuse of process and unlawful, offending against the torts of maintenance and champerty.(1) The torts of maintenance, where a third party to litigation provides financial support to one of the litigants without just cause, and champerty, where the third party supports the litigation in return for a share of the proceeds, were created in an earlier era, at a time when the prevailing concern was not about lack of access to justice because of insufficient financial means, but rather about wealthy men funding litigation for the purpose of harming their rivals and enemies.
Although those torts have been abolished by statute in Australia, Canada and the United Kingdom – but not in New Zealand – the New Zealand courts have followed those jurisdictions in not interfering with litigation funding arrangements on the grounds that they encourage access to justice and comity with other jurisdictions.(2)
The issues that have come before the New Zealand higher courts have concerned disclosure of litigation funding, costs and security for costs.
The two leading decisions on litigation funding in New Zealand, one dealing with representative actions and the other with non-representative actions, took different approaches to the extent of disclosure of the funding arrangements required.
Saunders v Houghton
In the earlier decision,(3) litigation funders Joint Action Funding Ltd (JAFL) and, later, Harbour Litigation Investment Fund LP (HLIF) funded litigation commenced on a representative basis by shareholders of Feltex against its directors after it was placed into liquidation, resulting in the loss of all shareholder equity.(4) The defendant directors applied to have the proceedings stayed on the basis that the funding agreement amounted to an abuse of process and was champertous.
The High Court considered that the funding agreement (with JAFL only at that stage) vested significant control over the conduct of the litigation in the third-party funder, including the sole right to decide whether to appeal, a prohibition on litigants communicating with opposing parties and the absence of any express termination clause. JAFL also nominated members of a committee, subject to approval by the plaintiff shareholders, which had the authority to make binding decisions about the conduct of the litigation on behalf of all plaintiffs.
The High Court concluded that, although the funding agreement was champertous, it did not amount to an abuse of process that would warrant a stay. The Court of Appeal did not expressly address the point when it upheld the High Court's decision on appeal. However, the Court of Appeal expressed the view that, like the common law of Australia and Canada, the common law of New Zealand should refrain from condemning, as tortious or otherwise unlawful, maintenance and champerty where:
The Court of Appeal observed that, while the issues concerning the making of a representation order and litigation funding are distinct, where the representation order is largely premised on the involvement of a third-party funder, the court should retain supervision of the funding proposal to ensure that appropriate arrangements remain in place. Supervision should extend to include ensuring that:
The Court of Appeal considered that approval of the funder and the funding arrangement was one part of a package of orders relevant to the initial representation issue and that proceeding as proposed would achieve the objectives of the representative action rules. The Court of Appeal noted a list of guidelines put forward by counsel for the directors, stating that it should be considered by the High Court as part of its overall evaluation of representation orders and that it identified questions that warranted recording for future consideration. The guidelines included the following suggested disclosure requirements:
Waterhouse v Contractors Bonding
In the later decision,(5) the Supreme Court imposed disclosure requirements on plaintiffs in a non-representative action whose legal costs of pursuing a claim were covered by a third-party litigation funder. The court expressly limited the application of its decision to third-party funders that had no prior interest in the proceeding and whose remuneration was tied to the success of the proceeding or that had the ability to exercise control over the proceeding. The court specifically noted that it was not addressing the position of supporting relatives, associated bodies, conditional fee arrangements by solicitors, lending on no more than a commercial rate of return or insurance-funded litigation.
The court assumed the continued existence of the torts of maintenance and champerty, noting however that it was not appropriate to comment on them as it had no factual foundation on which to base a discussion.
The court commented that it is not the role of the courts to act as regulators of litigation funding arrangements. However, as the discussion concerned non-representative actions, it left open the continued effect of Saunders v Houghton in relation to representative actions, something which the High Court has subsequently observed.(6) As a result, it appears that the courts have assumed a supervisory jurisdiction in relation to representative actions, but not non-representative actions.
The court accepted that the powers to control its process under the High Court Rules and the inherent jurisdiction were not limited to the tort of abuse of process. Funding arrangements may be challenged if they amount to an abuse of process or an assignment of a cause of action to a third party in circumstances where such an assignment is not permissible (eg, assignment of a cause of action for a personal tort). In that regard, the traditional categories of abuse of process include claims that:
The court ruled on the extent of disclosure required in non-representative cases:
The Court of Appeal recently described the Supreme Court in Waterhouse as taking a "cautiously permissive stance" towards litigation funding.(7) The Court of Appeal had observed, in an earlier decision,(8) that the Supreme Court was at pains to emphasise that the Waterhouse decision applied only to a narrow class of commercial third-party litigation funders.
Differences in the treatment of representative and non-representative actions extend to security for costs. There is an evolving practice of requiring third-party funders of representative actions to provide security for costs, which are usually quantified on a relatively generous basis in favour of defendants.(9)
The Court of Appeal, in Saunders v Houghton, remarked that the balance between plaintiffs and defendants is substantially altered by making orders for both representation and admission of a funder and that the alteration justifies the High Court, in exercise of its inherent jurisdiction, considering security for costs as a term of such orders.(10) In other words, security for costs may be ordered to protect the defendant against the effect of a procedure that might otherwise be oppressive. Security for costs will be required in most cases where the funder has no personal right at stake, takes part of the proceeds of any claim and is motivated by the financial considerations that gave rise to the common law prohibition of champerty.
Where security for costs is required, the quantum will be assessed on a case-by-case basis and should reflect a substantial contribution to the work required for the defendant. In Strathboss Kiwifruit Limited v Attorney-General,(11) the High Court considered that NZ$250,000 would be appropriate security for steps up to the preparation and service of lists of documents on discovery, to be followed by a further NZ$100,000 to cover inspection if there were no more than 45 represented plaintiffs. Leave was reserved to the defendant to seek a larger increment for inspection if there were more than 45 plaintiffs.
In the Saunders v Houghton costs decision,(12) the High Court held that awards of costs in litigation involving a third-party funder should be made on the usual established principles for fixing costs. Applying those principles, when considering the defendants' possible entitlement to an award of increased costs (above scale costs), funding arrangements might be relevant to assessing the overall conduct of the litigation by the other party, but the mere involvement of a third-party funder would provide no basis for an indemnity costs award (if there were otherwise no basis for such an award). Imposing indemnity costs merely because the plaintiff was supported by litigation funders was not only unjustified under established principles, but doing so would inevitably have an undesirable chilling effect on the potential availability of funding arrangements in cases where they may well be justified in the interests of facilitating access to justice.
Applying those principles, the two litigation funders (JAF and HLIF) were ordered jointly and severally to pay costs of NZ$3.07 million plus disbursements (which were not then quantified), subject in the case of HLIF to the fact that its contractual liability to indemnify the plaintiff for adverse costs orders was capped at NZ$5 million and it was not to be liable for costs relating to steps taken in the proceedings before its involvement.
Unlike some other common law jurisdictions, New Zealand has not legislated to extinguish or restrict the torts of maintenance and champerty. Despite that, to date, the New Zealand courts have adopted a pragmatic approach to the management of third-party funded litigation. That approach has apparently recognised the benefits of third-party litigation funding in promoting access to justice, while leaving issues arising from the availability of remedies against funders, under the torts of maintenance and champerty (which have been assumed to continue) for determination in the context of an actual claim of that nature. So long as there is no apparent abuse of process, funded litigation has been allowed to proceed. In the latter regard, the court in Saunders v Houghton did not interfere with a funding agreement that placed a significant degree of control in the hands of the third-party funder in relation to the strategy of the litigation.
The jurisdictional basis for supervising litigation funding agreements in representative actions has been held to be High Court Rule 4.24, which provides for approval on conditions of representative actions where parties have the "same interest". In contrast, the power to require disclosure of funding arrangements in relation to non-representative actions is less clear, with the Supreme Court citing none in Waterhouse.
At present, the courts exercise a supervisory jurisdiction over litigation funding agreements for representative actions, but not for non-representative actions. Nevertheless, the power of the courts to act to prevent abuses of process arising from funding arrangements has been explicitly recognised.
The closer supervision of representative actions may be justified on the basis that third-party funding of representative actions results in two degrees of separation: one between the funder and the representative party, the other between the representative and the represented parties. The result is arguably a higher risk that third-party funding of representative actions will lead to represented parties being bound by decisions over which that they had no control.
Unlike in jurisdictions that have addressed it by statute, the effect of the torts of maintenance and champerty on litigation funding remains to be determined by the New Zealand courts.
For further information on this topic please contact Chris Browne or Tom Burgess at Wilson Harle by telephone (+64 9 915 5700) or email (firstname.lastname@example.org or email@example.com). The Wilson Harle website can be accessed at www.wilsonharle.com.
(4) The claims were ultimately unsuccessful; for further details please see "Appeal comprehensively clarifies prospectus liability".
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