Litigation funding arrangements – not a legal concern

Litigation funding is an industry which has been hailed as a solution to the cost barriers facing impecunious claimants with meritorious claims.

Lara Bird

While the industry is now well-established and multiple jurisdictions have opened the way for litigation funding, it is an industry that can still divide opinion. One of the reasons for this divide is the ethical and legal concern that litigation funding arrangements can breach the common law torts of maintenance and champerty.

Context

The tort of maintenance is the improper support of litigation in which the maintainer has no legitimate interest, without just cause or excuse. Champerty is described as a subspecies of maintenance or an aggravated form of maintenance where the maintainer receives a portion of the proceeds in the relevant action.

These torts are still part of the common law in New Zealand. However, judicial concern about funding arrangements has morphed into an issue of whether the funding arrangement is an assignment of a bare cause of action in tort and the courts only tangentially consider maintenance and champerty.

In Saunders v Houghton [2010] 3 NZLR 331, our Court of Appeal noted that, “until quite recently common law courts held the firm position that, in the absence of legislation to the contrary, funding of litigation for profit was an abuse of process, offending against ancient doctrines of maintenance and champerty, and was unlawful per se”.

In a more recent case (Waterhouse v Contractors Bonding Ltd [2014] 1 NZLR 91), while not a claim alleging maintenance and champerty, the Supreme Court needed to consider the circumstances in which a litigation funding arrangement could be an abuse of process. The Court made clear that “assignments of bare causes of action in tort and other personal actions are, with certain exceptions, not permitted in New Zealand”.

While it now seems this rule has achieved an independent existence of its own, it had its origin in the torts of maintenance and champerty. The Court, in assessing whether a funding arrangement amounts to an assignment, noted it “should have regard to the funding arrangements as a whole, including the level of control able to be exercised by the funder and the profit share of the funder”.

It is now apparent that the courts have adopted a more liberal attitude towards the maintaining of litigation by a litigation funder than had previously been the case. This is perhaps in recognition of the harsh reality of current cost barriers to litigation. In Saunders v Houghton, the Court stated that “the interests of justice can require the court to unshackle itself from the constraints of the former simple rule against champerty and maintenance”.

Litigation funding is ordinarily provided on a non-recourse basis. That means that if a case is not successful, the funder loses its investment and does not generate any return. The United Kingdom’s self-regulator, the Association of Litigation Funders (the ALF), defines litigation funding as follows:

“[W]here a third party provides the financial resources to enable costly litigation or arbitration cases to proceed. The litigant obtains all or part of the financing to cover its legal costs from a private commercial litigation funder, who has no direct interest in the proceedings. In return, if the case is won, the funder receives an agreed share of the proceeds of the claim. If the case is unsuccessful, the funder loses its money and nothing is owed by the litigant.”

New Zealand does not yet have any regulations in relation to litigation funding or an independent body like the ALF, which has set a UK code of conduct for litigation funders binding on all members of the ALF.

However, the New Zealand courts have started to consider this code of conduct when assessing litigation funding arrangements, for example in Saunders v Houghton [2013] 2 NZLR 652, where the Court of Appeal noted that the funding agreement complied with the code. This code includes a rule preventing litigation funders from controlling the litigation or settlement negotiations.

Comment

In light of the abuse of process approach by the courts, the torts of maintenance and champerty are considered no longer fit for purpose and little may be lost by abolishing them, like other jurisdictions have done. The question now seems to be whether the funding agreement is an assignment of a bare cause of action in tort.

It is understandable why there is a legal concern about litigation funders. However, this concern should be minimised, if not eliminated, by a carefully drafted and properly structured funding arrangement. Such funding arrangement will leave the claimant as the party in control of the conduct of the litigation and the party primarily interested in the result of the litigation. If the litigation arrangement achieves this, no abuse of process should arise.

Indeed, reputable funders actively avoid exercising undue control over the litigation and aim for the claimant to maintain the dominant economic interest. In New Zealand, if litigation funders were to control or seek to recover the majority of the proceeds, they risk the funding arrangement being declared an abuse of process (under maintenance and champerty or assignment), which may result in the proceedings being stayed or the litigation funding arrangement being declared void, after potentially having already invested a significant amount of money in the case. This would be a careless investment and would obviously not be beneficial to the funder or the claimant.

Similarly, litigation funders want active and quality claimants – if funders have the dominant economic interest it is likely the claimant would be less incentivised to cooperate with the instructed solicitors or otherwise and generally less motivated to take the matter to resolution whether that be settlement or trial.

It is worth bearing in mind that disclosure of the funding arrangement may be required where an application is made to which the terms of the funding arrangement could be relevant. They ought therefore to be drafted with the presumption that they will at some stage be disclosed to the New Zealand courts. We have seen, in representative actions, that claimants are now (arguably) voluntarily disclosing the funding arrangements and seeking directions from the court for approval of the funding arrangement, as seen in the kiwifruit and bank fees claims. The fact of possible disclosure only strengthens the need for both the funded party and the funder to enter into appropriate funding arrangements.

Cases are already being funded in New Zealand and this will continue. If litigation funding is properly arranged by reputable and legitimate funders, the concern in relation to maintenance and champerty and/or assignment falls away and more claimants will gain the benefit of this legal innovation.

Lara Bird is an Investment Officer at Woodsford Litigation Funding Limited in London. She previously worked as a solicitor at Bell Gully in Auckland, largely in the area of competition litigation, before moving to global litigation firm Hausfeld & Co LLP in London and then to Woodsford Litigation Funding, where her role includes reviewing cases for possible investment, managing funded cases and considering opportunities in various jurisdictions around the world.

For readers interested in this topic, ADLS has an upcoming seminar entitled “Litigation Funding: A Practical Guide”, taking place on Tuesday 20 September 2016. For more information or to register, please click here.

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