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30 Aug 2006

Litigation funding allowed by High Court: funder loses battle but wins war

In Campbells Cash and Carry Pty Limited v Fostif Pty Ltd, the first decision by Australia's highest court on litigation funding, the Court held 5:2 that litigation funding was not an abuse of process or contrary to public policy. The majority was composed of Justices Gummow, Hayne and Crennan (in a joint judgment), Chief Justice Gleeson and Justice Kirby.

However, the appeals were allowed on a separate ground that the proceedings did not meet the requirement for a representative proceeding that, "numerous persons have the same interest" in the proceedings. The majority on this point was composed of Justices Gummow, Hayne and Crennan (joint judgment) and Justices Callinan and Heydon (joint judgment).

The decision will undoubtedly lead to an increase in funded litigation, although the decision about representative proceedings means that it remains to be seen what form such litigation will take.

The companion case of Mobil Oil Australia Pty Ltd v Trendlen Pty Ltd was decided on the same grounds.

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.

The proceedings were instigated by a litigation funder who was prepared to underwrite the litigation in exchange for one-third of any amounts recovered, plus the benefit of any costs order. The proceedings were brought as representative proceedings (under the Supreme Court Rules 1970, Pt 8, r 13, since replaced with Uniform Civil Procedure Rules r 7.4) but persons who wished to participate had to "opt in" and agree to the funder's terms.

Litigation funding

The joint judgment of Justices Gummow, Hayne and Crennan explained that in jurisdictions which had abolished maintenance and champerty as crimes and torts - New South Wales, Victoria, South Australia and the ACT - there were no public policy questions beyond those that would be relevant when considering the enforceability of the agreement for maintenance of the proceedings as between the parties to the agreement. In other words, once you have abolished the crimes and the torts of maintenance, 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 agreement. The Court did not decide the position for those states where legislation had not abolished maintenance and champerty as crimes and torts.

The joint judgment also considered a range of factors specific to the instant litigation that, alone or in combination, were not contrary to public policy or led to an abuse of process. They included:

  • the funder seeking out claimants, which the appellants described as "officious intermeddling"
  • the degree of control which the funder would have over the proceedings, the litigants' interests being said to be "subservient" to those of the funder.
  • the funder's retainer of a solicitor to act for the plaintiffs and represented parties was said not to lessen the funder's control of the proceedings but to give rise to possible conflicts of duty for the solicitor.
  • the funder obtained rights to litigate and did so with a view to profit. The funder was "a speculative investor in other persons' litigation".

Chief Justice Gleeson and Justice Kirby agreed with the reasoning of the joint judgment.

Representative proceedings

The appeals were allowed on the basis that at the time the proceedings were commenced they did not meet the requirement for a representative proceeding under Supreme Court Rules 1970, Pt 8, r 13 that, "numerous persons have the same interest" in the proceedings.

The joint judgment held that, while Fostif brought its own claim, it made no claim on behalf of any other tobacco retailers. Their participation in the proceedings, and any consequence for their rights, depended upon their 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. Consequently, at the time the summons was issued to commence the Fostif proceedings, there were no persons, other than Fostif, who had an interest in the proceedings which were instituted. The requirement of "numerous persons" was not satisfied.

Ramifications of the High Court's decision

The High Court's decision has lifted a cloud of uncertainty surrounding litigation funding. It is now clear that, at least in those jurisdictions which have abolished the crimes and torts of maintenance and champerty, funded litigation of all stripes will proceed without the threat of a challenge from defendants based on the existence of the funding.

We can expect to see an increase in the amount of funded litigation as a result and perhaps, in the longer term, the expansion of litigation funding into new areas of litigation or the emergence of funding models which do not presently exist. There will also be an emergence of new participants who see the opportunity for profitable investment in litigation.

That being said, 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.

There are still some areas of uncertainty, including the capacity of disgruntled claimants to challenge the enforceability of funding arrangements and the way in which funded litigation may structure "class action" procedures, especially in light of what the High Court has said about the NSW representative procedure. These areas of uncertainty merely illustrate the extent to which litigation funding is an emerging phenomenon with the capacity to change the way in which litigation occurs in this country.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.