Litigation funding agreements - maybe not so private anymore - Court Procedure

Key details of litigation funding agreements (LFAs) may now have to be released to the other party or parties as well as to the court.

This is the effect of a recent Court of Appeal decision and brings New Zealand in line with Australian practice.

Court supervision of LFAs

LFAs were until recently held outright to be an abuse of process. Judges were concerned about the now antiquated torts of maintenance (assisting another to sue) and champerty (taking part of the proceeds of the action). However the fundamental principle of access to justice has trumped these concerns, allowed litigation funding to become a prominent feature in English and Australian litigation. It is still in its infancy in New Zealand.

There is an inherent tension with LFAs. On the one hand, the courts are wary that a litigation funder may usurp control of the proceedings from the litigant and his or her solicitor, taking the litigation outside the reach of the court's supervision. On the other hand, LFAs are often the only way that a plaintiff can get a case to court.

The accepted compromise in New Zealand has been to allow LFAs, with careful management to ensure that the arrangement does not offend against the policy of those medieval torts of maintenance and champerty. Managing this risk requires judges to supervise at least some elements of the LFA. The difficulty has been in how invasive courts should be in this supervision.

Saunders v Houghton

In Saunders v Houghton, a "class action" case, the High Court required the plaintiff to produce the LFA to the Court (but not the other party).¹ The Court then assessed the entire agreement against aspects such as the qualifications and prior conduct of the litigation funder, the independence of the acting lawyer and the interaction between the acting lawyer and the funder.

That approach was slightly out of kilter with Australia, where the funded party must disclose the LFA to both the court and the other party. The Federal Court of Australia² requires LFAs in class actions to be disclosed, but some key details may be redacted from the agreement, to avoid granting the other party any unfair tactical advantage.

Contractors Bonding Ltd v Waterhouse

Recently, in Contractors Bonding Ltd v Waterhouse, the Court of Appeal had the opportunity to reconsider New Zealand's approach.

Being an action brought by an individual as opposed to a representative (or "class") action, the Court was hesitant to intrude too readily on the funded party's LFA but recognised nonetheless that some judicial scrutiny was necessary. The question was how intense that scrutiny should be.

The Court saw the principles in Saunders as applicable to individual actions, but observed that class actions require more intense scrutiny. Class actions involve large numbers of plaintiffs, so they can be oppressive. Courts have more responsibility for them generally and LFAs are frequently looked at in approving class action claims.

Even though Contractors Bonding was not a class action case, the Court held that the other party should see elements of the LFA, both because "the extent of control by the funder is not the only criterion of potential interest to the Court" and because the other party may help the Court on the legal argument as to whether the LFA is acceptable.

The Court was aware that disclosure may give strategic advantages to the other party such as information about the funded party's "war chest". To combat this, the Court limited the required disclosure to a redacted version of the LFA divulging only certain key details, being:

the identity and location of the litigation funder
the funder's financial standing/viability
the funder's amenability to the NZ jurisdiction, and
the terms on which the funding can be withdrawn, and the consequences of withdrawal.

The Court ended by saying that, in comparison to class actions, individual actions raise less significant issues in terms of oppression, especially when weighed against the principle of access to justice. So the need for intense scrutiny of LFAs is diminished in individual actions.

Chapman Tripp's comment

Revealing details of a private agreement to both the Court and the other party will not sit comfortably with parties entering into LFAs. Inevitably, concerns of privilege and confidentiality will arise.

Parties should be mindful when entering into LFAs that they will have to disclose details of that agreement to the other party. And, as is the way in litigation, those parties should be prepared for delays caused by challenges to the LFA by the other party.

The Supreme Court has, however, granted leave for the funded party in Contractors Bonding to appeal on the question of what must be disclosed to the other party. So the final position on disclosure of LFAs may not be known until sometime next year.

Footnotes

¹The High Court's ruling that the LFA need not be disclosed to the other parties was appealed to the Court of Appeal. However, this issue was resolved prior to delivery of the Court of Appeal's judgment.

²Practice Note CM17

The information in this article is for informative purposes only and should not be relied on as legal advice. Please contact Chapman Tripp for advice tailored to your situation.