Third-party funding agreements, an established part of civil litigation overseas, have so far been little used in New Zealand but are becoming more common.
Last week the Supreme Court issued a definitive ruling on such agreements, holding that the courts have no general role of regulating third-party funding. Accordingly, in the ordinary course, only the existence of such an agreement and location of the funder, but not the agreement itself, must be disclosed when proceedings are issued.
The issue arose in a dispute between New Zealand parties (the Waterhouses) suing a United States company (Contractors Bonding Ltd) in relation to a failed insurance business. When Contractors Bonding was informed by the Waterhouses of the existence of litigation funding, it applied for a stay of the proceeding on the grounds of abuse of process.
Contractors Bonding based its application on the rules against maintenance and champerty, which have for centuries prohibited third-party intermeddling in litigation. The influence of these rules has been on the decline in Commonwealth countries for several decades and their modern effect is often unclear. For instance, when third-party funding is used:
should the trial court be required to pre-approve litigation funding (as held in the High Court), or
should principal terms of any funding agreement be required to be provided to the defendant, with the court determining any objection (as held in the Court of Appeal).
The Supreme Court decided differently to both lower courts.
The Court was invited to abolish the torts of maintenance and champerty but declined to do so. This reluctance to administer a death blow to these doctrines, despite acknowledging their declining relevance, can be seen in other Commonwealth jurisdictions. In July, for instance, the Singapore High Court confirmed that, until abolished by the legislature, the torts continue to exist in Singapore.
Instead, the Supreme Court found that New Zealand courts have no general role in regulating litigation funding agreements and there is no automatic requirement on a plaintiff receiving third party funding to provide a costs indemnity or security.
Rather, the nature and effect of the funding agreement falls to be assessed only where it is relevant to an ordinary application made by a party. This may be the case where the defendant applies for:
security for costs against the plaintiff
a third party costs order against the funder, or
a stay on the grounds that the funding amounts to an abuse of process.
An abuse of process will arise where the Court’s process is being used improperly, deceptively or vexatiously and where the nature of the litigation funding agreement amounts to a bare assignment of a legal claim. The Court did not detail when a bare assignment will occur, making only general references to the “level of control able to be exercised by the funder and the profit share of the funder”.
Despite not requiring disclosure as a general rule, the Court held that (unless the stay application was withdrawn) a redacted version of the litigation funding agreement must be disclosed by the Waterhouses.
Although the Court will not regulate or assess the fairness of any bargain between the funder and a plaintiff, such agreements do not fly completely under the radar.
There are four key points to take away.
The Court now requires disclosure, as soon as proceedings are issued, of the identity and location of any litigation funder.
Funding agreements themselves may also be required to be disclosed where this is relevant to an application for security for costs or third-party costs, or where a stay is sought on the grounds of abuse of process.
Provided a defendant is prepared to risk paying costs on an unsuccessful but credible stay application, they will still in many cases be able to compel disclosure of a funding agreement.
In order to defeat an abuse of process argument, it will remain important to draft litigation funding agreements carefully to avoid effecting a bare assignment. The distinction, not always easy to draw, is between a true funding agreement for an engaged plaintiff, and a wholesale transfer of rights with the plaintiff remaining only a figurehead.
For more information, please contact the lawyers featured.