04 December 2006
Key Points:
It is now clear that in those jurisdictions that have abolished the torts and crimes of champerty and maintenance funded litigation can proceed without the threat of challenge from defendants based on the existence of the funding.
In Campbells Cash and Carry Pty Limited v Fostif Pty Ltd [2006] HCA 41, the first decision by Australia's highest court on litigation funding, the Court held 5:2 that the fact that the proceedings were being maintained and orchestrated by a litigation funder did not render the proceedings an abuse of process or contrary to public policy.
However, the appeals were allowed on a separate ground that the proceedings did not meet the requirement for a representative proceeding under the NSW Supreme Court Rules that "numerous persons have the same interest" in the proceedings.
The decision has lifted a cloud of uncertainty surrounding litigation funding. It is now clear that in those jurisdictions that have abolished the torts and crimes of champerty and maintenance (the Australian Capital Territory, New South Wales, South Australia and Victoria) funded litigation can proceed without the threat of challenge from defendants based on the existence of the funding.
Background
The proceedings concerned claims for the recovery of amounts paid by tobacco retailers to tobacco wholesalers, allegedly for the purposes of the wholesalers paying a licence fee, later found to be unconstitutional. As a result, the amounts sought to be recovered in the proceedings were never paid by the wholesalers to the various State and Territory Governments.
The proceedings were instigated by a litigation funder who was prepared to underwrite the litigation (and meet any costs order against the plaintiffs) in exchange for one-third of any amounts recovered, plus the benefit of any costs order. The proceedings were commenced under Part 8 rule 13 of the NSW Supreme Court Rules (which has since been replaced by Uniform Civil Procedure Rules r 7.4 which is in similar, but not identical, terms) and brought on behalf of other tobacco retailers who:
Litigation funding
Litigation funding is the payment of litigation costs in exchange for a proportion of any amount recovered in the litigation plus the benefit of any costs order by a person who is not a party to the litigation and who has no direct interest in its outcome.
The common law has traditionally regarded such arrangements with suspicion - at least outside the context of insolvency - because of concerns about the propensity of such arrangements to subvert judicial process. Litigation funding has been categorised as either "maintenance", improperly encouraging litigation or "champerty", funding another person's litigation for profit.
In more recent times, there has been a recognition that concerns about subverting the judicial process are not as significant and that the maintenance of litigation may improve access to justice. Furthermore, many jurisdictions have abolished maintenance and champerty as torts and crimes. NSW did so in 1993 by the Maintenance, Champerty and Barratry Abolition Act. The ACT, South Australia and Victoria have passed similar legislation.
The question which arose for consideration in Fostif was whether, in light of these changes in policy and law, a defendant could still seek a stay of funded proceedings. Justices Gummow, Hayne and Crennan in a joint judgment (with whom Chief Justice Gleeson and Justice Kirby agreed on this issue) concluded that, in jurisdictions which had abolished maintenance and champerty as crimes and torts, these concepts cannot be used to found a challenge to proceedings which are being maintained. Their only relevance is in a dispute between plaintiff and funder about the enforceability of the funding agreement. To the extent that concerns remain about the potential for litigation funders to subvert the judicial process, such conduct could be addressed by existing doctrines of abuse of process and other elements of the court's processes.
The Court did not decide the position for those states where legislation had not abolished maintenance and champerty as crimes and torts, namely the Northern Territory, Queensland, Tasmania and Western Australia.
Representative proceedings
The Supreme Court Rules 1970, Pt 8 r 13 provided:
(1) Where numerous persons have the same interest in any proceedings the proceedings may be commenced, and, unless the Court otherwise orders, continued, by or against any one or more of them as representing all or as representing all except one or more of them.
The joint judgment observed that "the authority given by Pt 8 r 13(1) to commence representative proceedings depended upon there being, at the time the proceedings were commenced, 'numerous persons [having] the same interest' in the proceedings".
A close analysis of the pleading showed that, while Fostif brought its own claim, it made no claim on behalf of any other tobacco retailers. Their participation in the proceedings depended upon them choosing to opt in to the proceedings. The funder obviously hoped that many retailers would opt-in after the proceedings were instituted but that was only a hope as to future events. However, at the time the summons was issued, there were no persons, other than Fostif, who had an interest in the proceedings. The requirement of "numerous persons" was not satisfied. Justices Callinan and Heydon agreed with the joint judgment.
Ramifications: Regulation of litigation funding
The High Court's broad statement of principle can be seen as a recognition that, in the modern age of active case management by the courts, the risk of abuse of the court process is much lower and the capacity of the courts to address such abuses much greater.
However, the shape of the emerging litigation funding industry and its overall effect on litigation will depend to a large extent on whether the various governments choose to regulate the industry and, if so, in what way. The Standing Committee of Attorneys-General ("SCAG") has sought submissions on whether legislative action is needed on:
The courts that had dealt with litigation funding before Fostif had set out various criteria that they measured a funding arrangement against to determine if it was an abuse of process or it was contrary to public policy. The criteria included matters such as whether:
SCAG's discussion paper sought comment on whether these factors should be formalised. The joint judgment in Fostif suggests that these requirements will not emerge from the common law.
There also needs to be prudential regulation which ensures that litigation funders are entities of substance who have the resources to pay legal costs. The brake on unmeritorious litigation that the costs rules provide are ineffective if litigation funders are $2 companies unable to pay an adverse costs order.
Ramifications: Time for class action reform
The New South Wales representative procedure was devised in the 19th century. A number of judges have commented on the need for reform, including Chief Justice Gleeson in the High Court and President Mason in the NSW Court of Appeal. In addition to the uncertainty created by the Fostif decision as to how a proceeding should be structured under the NSW rules, the rules do not deal with other important matters such as alterations to the description of the group, notices, settlement or discontinuance. Legislative or rule-based amendments that address the key requirements for an efficient class action procedure are now needed.
For further information, please contact Michael Legg and Greg Williams.
