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Focus: Commercial Litigation – August 2006

High Court gives green light to litigation funding

In brief: Partner Peter O'Donahoo(view CV) and Lawyer Susie Downie look at today's High Court decision in Campbell's Cash & Carry Pty Ltd v Fostif Pty Ltd [2006] HCA 41 with respect to litigation funding and consider the implications of that decision for third-party funded litigation in Australia.

Introduction

Historically, the common law in Australia has prohibited maintenance (supporting litigation, regardless of the reason) and champerty (supporting litigation in exchange for a share of the proceeds of that litigation), on the basis that they are contrary to public policy. However, maintenance and champerty have now been abolished as crimes and torts in most Australian jurisdictions, and recent court decisions have made it plain that litigation funding is now a reality in Australia. Courts throughout the country have accepted, as a matter of public policy, that litigation funded by third parties may allow parties who would otherwise be denied access to justice to proceed with their claims. However, until today's High Court decision in Fostif, there was some uncertainty as to what elements of a litigation funding agreement might render it contrary to public policy and an abuse of process.

Fostif – background

A class action was brought by a number of tobacco retailers against licensed wholesalers for the recovery of state licence fees, following the High Court's declaration in Ha v State of New South Wales (1997) 189 CLR 465, that the tobacco licensing schemes of the states and territories were invalid. The proceeding was financed by a litigation funder, Firmstone, on the basis that it would take one-third of the proceeds if the case were successful.

At first instance, Justice Einstein of the New South Wales Supreme Court held that the proceeding was an abuse of process and fell outside the court rules permitting representative proceedings. The Court of Appeal allowed the appeal and ordered the proceedings to continue as representative proceedings. The Court of Appeal found that neither Firmstone's role in connection with the litigation nor the particular funding arrangements justified staying the proceeding. The Court of Appeal's findings included that:

  • champerty or third-party assistance per se does not amount to abuse of process;
  • the court is not concerned with the arrangements between the funder and the plaintiff unless they have corrupted, or have a tendency to corrupt, the processes of the court;
  • in circumstances where the plaintiff's claim is viable, as was held to be the case here, the standard of proof for a permanent stay is high, and the court will only dismiss the proceeding as a last resort means of eliminating the abuse; and
  • some measure of control over the proceedings by a litigation funder is necessary if the funder is to manage the group litigation and protect its own interests, and is not a basis for finding abuse of process meriting an unconditional stay.

The High Court granted special leave to appeal in September 2005.

The High Court's judgment

In Campbell's Cash & Carry Pty Ltd v Fostif Pty Ltd, the High Court upheld the wholesalers' appeal on the question of whether the proceedings should continue as representative proceedings. However, the appeal was dismissed on issues of public policy and abuse of process arising from the funding agreement between the retailers and Firmstone.

Justices Gummow, Hayne and Crennan, with whom Chief Justice Gleeson and Justice Kirby agreed on this issue, made the following points in concluding that the funding arrangements between Firmstones and the retailers did not constitute a ground to stay the proceedings.

  • Section 6 of the legislation abolishing the offences of maintenance and champerty in New South Wales, the Maintenance, Champerty and Barratry Abolition Act 1993 (NSW) (the Abolition Act), made it clear that questions of maintenance and champerty were not to be regarded as always legally irrelevant. That section preserved any 'rule of law as to the cases in which a contract is to be treated as contrary to public policy or as otherwise illegal'. However, the Abolition Act neither stated explicitly whether questions of maintenance and champerty are relevant to issues of abuse of process nor addressed the scope of public policy or doctrines of illegality concerning those questions.
  • In their Honour's view, the wholesalers' proposition that for the maintainer to institute and continue proceedings in the name of, or on behalf of, the maintained plaintiffs was an abuse of process which could be avoided only by a stay assumed that maintenance and champerty give rise to public policy questions beyond those relevant when considering whether the funding agreement is enforceable between the parties. However, in jurisdictions where legislation like the Abolition Act has been enacted, that assumption is not valid, for several reasons:
    • when the crimes and torts of maintenance and champerty were abolished, any wider rule of public policy, beyond the rules preserved by s6, lost any basis that it previously had; and
    • the asserted rule of public policy would not yield any certain rule, because the content and basis of the public policy asserted was identified only by the use of terms such as 'trafficking' or 'intermeddling'.
  • The particular complaints by the wholesalers that Firmstone had sought out claimants, exercised a great degree of control over the proceedings and bought the rights to litigation to obtain profit were not, either alone or in combination, contrary to public policy or resulting in an abuse of process. Their Honours held that many people seek to profit from assisting in litigation, and seeking out and encouraging litigation could only be contrary to public policy if there were still a rule against maintaining actions. In the absence of such a rule, either in crime or in tort, there was no foundation to conclude that maintaining an action could be contrary to public policy.
  • Moreover, fears concerning the adverse effects on the processes of litigation and the fairness of the agreement between the funder and the plaintiff are not sufficient to justify an 'overarching rule of public policy' that would prohibit funded actions or require funding agreements to meet particular standards concerning the funder's degree of control or reward. Such a rule 'would take too broad an axe to the problems that may be seen to lie behind the fears'. Similarly, fears for the administration of justice (for example, that the funder might inflame the damages or suppress evidence) can be adequately met by existing doctrines of abuse of process, and fears that lawyers might find themselves in positions of conflict are also adequately addressed by the existing rules regulating their duties to the court and clients.
  • Importantly, their Honours considered it neither necessary or appropriate to consider the position in jurisdictions where maintenance and champerty continue to be torts or crimes.

Justices Callinan and Heydon dissented on this point. Their Honours found that the Court of Appeal's decision on this issue should be overturned. Their Honours found that a combination of factors rendered the proceedings an abuse of process, including Firmstone's motive of profiting from the litigation of others, the fact that Firmstone sought out and encouraged persons to sue who would not otherwise have done so, the large gains hoped for by Firmstone, Firmstone's control of the litigation and the subservience of the retailers' interests to those of Firmstones.

Implications of the High Court's decision

The High Court's decision is likely to encourage the number of litigation funders and funded cases, particularly for class actions which through economies of scale may be seen to offer the best chance of a large return for funders. Previously, it was difficult to predict whether a particular litigation funding agreement would be stayed on public policy grounds. That uncertainty has now been largely removed, at least in New South Wales, Victoria, South Australia and the ACT, where the torts of maintenance and champerty have been abolished. The position remains unclear in the remaining jurisdictions.

The decision is of concern to defendants. The majority judgment appears to dismiss many of the public policy considerations that have been identified in lower courts as significant. Those considerations include the importance of protecting plaintiffs where their interests might conflict with those of the funder and the need to discourage unmeritorious litigation to ensure an appropriate balance in the civil justice system. The decision of the majority of the High Court suggests that courts should be slow in staying proceedings as an abuse of process on the basis of funding agreements.

The decision may also impact on what, if any, regulation of litigation funding is considered by the Standing Committee of Attorneys-General (SCAG). The Discussion Paper released by SCAG in late May on the issue of litigation funding notes the lack of legislative uniformity across Australia on this issue. That lack of uniformity has been highlighted by the High Court's decision in Fostif and may encourage action on the part of SCAG. Further, the need to protect vulnerable plaintiffs who enter into funding agreements has also been highlighted by SCAG, and may be given further consideration in light of the High Court's judgment. It is unclear whether other aspects of the decision will influence the outcome of SCAG's review.

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