Background
High Court minute
Court of Appeal judgment
Supreme Court decision
Comment
The Supreme Court has imposed disclosure requirements on plaintiffs whose legal costs of pursuing the claim are covered by a third-party litigation funder.(1)
Godfrey and Robert Waterhouse brought proceedings against Contractors Bonding Ltd in relation to a failed insurance business in the United States. They alleged negligence, deceit and breach of fiduciary duty. The proceedings were financed by a third-party litigation funder.
In the High Court, Contractors Bonding Ltd applied for a stay of the proceedings until:
- the funding agreement was disclosed, including the identity of the funder and nature of the relationship between it and the plaintiff;
- the plaintiffs had obtained leave to prosecute the proceedings; and
- adequate security was provided.
The stay application was made on the basis that, among other things, it was necessary to prevent abuse of the court's process. The High Court ordered that the funding arrangement be disclosed to it so that it could ensure that the funder could not usurp control of the proceedings. It reviewed the agreement and then issued a minute recording that there was nothing in the agreement that would warrant its disclosure.
Contractors Bonding Ltd appealed. The Court of Appeal considered that the appeal raised two issues:
- Should the courts exercise oversight over proceedings between individual litigants where a funder is involved?
- If so, what is the nature and extent of the oversight?
It held that, where a funder is involved, the court and other parties should be notified of that fact when the proceeding is commenced and the following details are to be disclosed:
- the identity of the funder;
- its financial standing and viability;
- its amenability to the jurisdiction of the New Zealand courts; and
- the terms on which funding can be withdrawn.
It held that these details were relevant to determining whether the agreement raised abuse of process issues and ordered that a redacted version of the agreement be disclosed.
The Waterhouses appealed. The Supreme Court considered six issues:
- Should the torts of maintenance and champerty be abolished?
- Should the courts exercise a general supervisory role over litigation funding arrangements?
- Can the courts intervene only where conduct amounting to the tort of abuse of process is manifest?
- Are there other matters relevant to abuse of process in third-party funded cases?
- When should disclosure of litigation funding arrangements be made?
- Are there any limits on disclosure?
Before turning to consider these issues, the court noted that its judgment was limited to cases involving third-party funders with no prior interest in the proceedings, which have some control of the proceedings, and whose remuneration is tied to the level of success achieved. The court emphasised that the judgment did not relate to funding by relatives or related bodies, conditional fee arrangements of solicitors, funding on no more than a commercial rate of return or insurance-funded litigation.
In relation to the first issue, the court held that, as the appeal did not involve an action in maintenance or champerty and as it had no factual foundation on which to base a discussion, it was not appropriate to comment on the torts.
On the second issue, the court held that it is not the role of the courts to act as regulators of funding arrangements. If that were desirable, the court held, it would be a matter for legislation or regulation.
In relation to the third and fourth issues, it held that the court's powers under the High Court Rules and the inherent jurisdiction are not limited to the tort of abuse of process. It held that it is not an abuse of process for the funder not to provide indemnity to the funded plaintiff for costs, as the third-party costs regime in New Zealand enables costs orders to be made against funders. Nor do the terms on which funding can be withdrawn form a basis for abuse of process, as a defendant is always faced with the possibility that a plaintiff will run out of funds.
Funding arrangements, it held, can be challenged on traditional abuse grounds and also if they amount to an assignment of a bare cause of action in tort or another personal action, as those actions (with some exceptions) cannot be assigned. In such circumstances, the arrangement will amount to an abuse of process. In determining whether there is an assignment in effect, the courts should consider the funding arrangement as a whole, including the level of control that can be exercised, the profit share of the funder and the role of the lawyers involved.
It held, on the fifth issue, that where a litigation funder is involved, at the commencement of the proceeding, the identity of the funder and its amenity to the jurisdiction of the New Zealand courts should be disclosed. The financial means of the funder and the circumstances in which funding can be withdrawn need not be disclosed. If an application is made to which the terms of the agreement may be relevant (eg, for abuse of process, a third-party costs order or security for costs), the agreement itself should be disclosed, but privileged material or information that would give a tactical advantage should not be disclosed. In such cases, the disclosure should be to all other parties, not only to the court.
The effect of this judgment is that plaintiffs that are financed by a third-party litigation funder will be required to disclose to defendants, at the outset of a proceeding, the identity of the funder and whether the funder is subject to New Zealand jurisdiction. Provision of this information may lead to applications by defendants for security for costs or for a stay on the basis of abuse of process. If such applications are made, the terms of the funding agreement may have to be disclosed (subject to certain redactions). A stay on the grounds of abuse of process may be granted either on traditional abuse grounds or where the agreement constitutes an assignment of the cause of action where such assignment is not permissible.
Litigation funding is becoming more prevalent in New Zealand. The disclosure required by the Supreme Court is likely to lead to more defendants seeking security for costs when they are notified that a funder is involved or applying for a stay on the basis of abuse of process.
Notably, the Supreme Court did not refer to the jurisdictional basis for its ruling that certain funding details must be disclosed at the commencement of proceedings. It relied on the reasoning that disclosing the identity of the funder would allow the court and other parties to know who the "real parties" to the litigation are.(2) Nor did the judgment set out how the disclosure should be effected in practice.
The position can be contrasted with the situation relating to legal aid for civil proceedings. Where a plaintiff in civil proceedings is legally aided, this must be disclosed on the general memorandum attached to the notice of proceeding. Such disclosure is a clear statutory requirement of the Legal Services Act 2011 (Section 24) and the requirement also appears in the prescribed form of notice of proceeding. There is no similar statutory requirement to disclose third-party funding. The Supreme Court judgment also noted, without further discussion, a series of conflicting decisions in the High Court concerning the jurisdiction of the court to order disclosure of litigation funding in the context of security for costs.(3)
For further information on this topic please contact Chris Browne or Felicity Monteiro at Wilson Harle by telephone (+64 9 915 5700), fax (+64 9 915 5701) or email ([email protected] or [email protected]). The Wilson Harle website can be accessed at www.wilsonharle.com.
Endnotes
(1) Waterhouse v Contractors Bonding Ltd [2013] NZSC 89.
(2) Paragraph 68.
(3) Hamilton v Papakura District Council [1997] 11 PRNZ 333; Chisholm v Auckland City Council [2000] 14 PRNZ 302; Jupiter Air Ltd (in liq) v Australian Aviation Underwriting Pool Pty Ltd [2002] 16 PRNZ 333 (HC); Hampton Securities Ltd v Accent Management Ltd HC Auckland CIV-2005-404-3127, March 28 2007; New Zealand Vee Eight Entrants Group Association Ltd v Petch [2012] NZHC 2350.
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