Litigation Funding

The High Court has just upheld the validity of litigation funding in Campbells Cash and Carry Pty Limited v Fostif Pty Limited [2006] HCA 41.

As the name suggests, the idea behind litigation-funding companies is that they pay the costs of litigation on behalf of litigants. If the client wins, the company takes a share of the proceeds of the win, but if the client loses, the funding company pays the other party’s costs. Litigation-funding companies help parties who would otherwise not be able to afford to litigate to bring legal actions.

The present case is just the latest instalment in a long history of litigation involving the invalidity of licence fees in respect of tobacco. All States in Australia levied a licence fee, which was included in the price of tobacco products when sold by retailers. The retailers passed the licence feeson to the wholesalers. It was then intended that the wholesalers would then pass the fees on to the respective State revenue offices.

However, in August 1997, in Ha v New South Wales (1997) 189 CLR 465, the High Court held that the States did not have the power to levy the licence fees, as they fell within the definition of “excise” according to s 90 of the Constitution. Subsequently, in Roxborough v Rothmans of Pall Mall Australia Lid (2001) 208 CLR 516, the High Court held that retailers were entitled to restitution of the sums paid to the wholesalers.

Firmstones was a litigation-funding company. During 2002, it sought to encourage tobacco retailers to claim the licence fees to which they were entitled from tobacco wholesalers according to Roxborough. It wrote to various retailers asking for authority to act on the retailers’ behalf. If successful, Firmstones’ would retain 331/3 per cent of any money received by the retailer from the tobacco wholesaler. If costs were awarded to the retailer, Firmstones would retain its “success fee”, but if costs were awarded against the retailer, Firmstones would bear those costs.

Firmstones formed the view that the limitation period for retailers to make claims against wholesalers expired at the end of June 2003, and it believed that there were many retailers who had not yet considered making a claim.

Accordingly, on 30 June 2003, Firmstones caused Mr Richards (the solicitor acting for Firmstones and the retailers) to issue a number of summonses in the Commercial List of the Equity Division of the Supreme Court of New South Wales. The proceedings were brought pursuant to Pt 8 r 13 of the Supreme Court Rules 1970 (NSW) and were representative proceedings. Specific plaintiffs were named in the summonses, but the summonses also purported to bring action on behalf of various “unnamed persons” whose identities would be known by the time of judgment. These representative proceedings were “opt-in”, meaning that parties could opt in to the litigation at a later date.

In 2003, Einstein J held that the proceedings could not continue as representative proceedings. His Honour found:

  1. That the “litigation funding arrangements proposed by the opt-in procedure are against public policy as well as comprising an abuse of the court process”;
  2. The persons whom the plaintiff proposed to represent “cannot be said to have the “same interest” in the proceedings”; and
  3. To permit the proceedings to go forward as representative proceedings, would not facilitate “the just, quick and cheap resolution of the real issues”, it would instead “give rise to a procedural morass likely ultimately to be able to be resolved only by a disaggregation of the representative proceedings into separate proceedings”.

The High Court considered a number of questions in the Campbells judgment.

First, the Court considered whether the plaintiffs had the “same interest” in proceedings. A majority (Gummow, Hayne and Crennan JJ; Callinan and Heydon JJ) held that the plaintiffs failed to establish that they and the unnamed persons had the “same interest” as required by the 1970 Supreme Court Rules. This was because at the time when the summonses were issued, there was only one plaintiff seeking relief. It was contemplated that other plaintiffs would later join, but it could not be said that there were numerous other persons with the same interest in proceedings at that time. Gleeson CJ and Kirby J dissented in separate judgments.

Secondly, the Court considered whether litigation-funding companies were against public policy. On this issue, a majority held that litigation-funding companies were not contrary to public policy (Gleeson CJ, Gummow, Hayne and Crennan JJ and Kirby J). Callinan and Heydon JJ dissented in a joint judgment, where they stated that litigation funding was an abuse of process because Firmstones’ primary object in bringing the litigation was profit.

In the course of its reasoning, the Court considered the history of the torts of champerty and maintenance, and the way in which these torts are essentially obselete in present day circumstances. [As an aside, I think champerty must be one of my favourite legal names. It makes me think of a team of big cart horses champing at the bit – champerty, champerty, champ!). I know that it is obsolete, but I still like it.]

At para [95], Gummow, Hayne and Crennan JJ conclude that litigation funding is not an abuse of process:

The difficulties thought to inhere in the prosecution of an action which, if successful, would produce a large award of damages but which, to defend, would take a very long time and very large resources, is a problem that the courts confront in many different circumstances, not just when the named plaintiffs represent others and not just when named plaintiffs receive financial support from third party funders. The solution to that problem (if there is one) does not lie in treating actions financially supported by third parties differently from other actions. And if there is a particular aspect of the problem that is to be observed principally in actions where a plaintiff represents others, that is a problem to be solved, in the first instance, through the procedures that are employed in that kind of action. It is not to be solved by identifying some general rule of public policy that a defendant may invoke to prevent determination of the claims that are made against that defendant.

I believe that this decision is to be applauded. Otherwise litigation can be out of the price range of the ordinary person, even though they may have quite a good chance of success. Private entities are unlikely to help with litigation unless they can make a profit out of it. Firmstones’ main object may indeed be to make a profit from successful litigation, rather than to uphold justice. However, the same can be said for both law firms and barristers, so I do not think that this criticism stands up. The important thing is that the legal system should remain accessible to average people, and not just something which can only be afforded by an elite and well-off section of society. If litigation funding is a way of promoting this, then so be it.

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2 Comments

Filed under high court, litigation funding

2 responses to “Litigation Funding

  1. KY

    All very well, but where one might run into problems is that litigation funding schemes may well be an attractive way for underworld figures to launder money and take a punt (they can always “enforce” their less formalised arrangements by means foul or fair).

    In HK there had been persistent rumours that a number of pieces of high profile civil litigation were funded by triads. True to form, in one of the cases, when the applicant had wins at first instance and first appeal, various alleged triad members are alleged to have “sold” their “shares” in the litigation to other alleged triad members, and all hell broke loose in the underworld when the final appeal court dismissed the applicant’s case.

    The moral of the story is: litigation funding arrangements should be regulated and only be enforceable under certain circumstances.

    Separately, if a funder can work on a “contingency funding” basis, then surely lawyers can work on a “contingency fee” basis. I have always been of the view that concerns about contingency fees are unjustified – in America the problem has always been more that costs don’t follow the event.

  2. Litigation funding arrangements are regulated and approved by each state. There are certain circumstances in which a lender will not fund a case. For instance, in the United States lenders will not fund cases involving workers compensation in some states. A lender will also not fund cases unless the plaintiff has hired an attorney on a contingency fee basis.

    Litigation financing is becoming a big business in the United States. In fact I read an article recently that implied certain hedge funds are now getting into the litigation financing business.

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